February 7, 2010

What do Admob, CafePress, Aardvark, Polyvore, and Xoopit have in common?  If you said that they were all backed by great VC’s like Sequoia, August, Benchmark, and Accel, you would be correct.  But did you know that they are also all backed by the same seed stage investor as well?

What these companies all have in common is that they are all portfolio companies of Harrison Metal Capital. With 3 exits in 2009 (Admob, Xoopit, and GeoAPI) Harrison Metal is one of the hottest of an emerging category of investors that some call “Micro VC’s”.  Harrison Metal isn’t alone in their success – there is Maples Investments (SolarWinds, ngmoco, Chegg), Founder Collective (Hunch, 20×200, Milo), and probably another dozen or so firms like these that have emerged over the past 5 years.

What these firms all have in common is a fund strategy and size that is both different from and complimentary to traditional VC’s.  Their investment strategy and sub $50M funds are well suited for the increased capital efficiency of certain sectors and the fact that larger VC’s have difficulty deploying capital in $1M chunks. It’s also a very attractive option for entrepreneurs in that it preserves option value. Mike Maples puts is best:

“Smaller up-front investments create a greater range of exit strategies where everyone wins. For example, if a business raises a small amount of initial capital, then exceeds its early milestones and decides to swing for the fences, it can then raise a larger sum at a higher price, while preserving ownership. If the business is not ready for rapid growth, it preserves the option for an exit at around $50 million, while still delivering a high return for investors.  This dual-track model is less available to companies that raise large amounts of money early.”

It should be noted that most of these fund aren’t shooting for mid-sized wins.  But their size allows them to do quite well with mid-sized wins, and it is well suited for consumer internet investments where it’s often very difficult to predict whether a company has the chance to be big enough to produce “venture returns”.

I think these firms are excellent investments (looking from an LP perspective).  Their strategies fit the times and inefficiencies in the market.  They also do wonders for their local entrepreneurial ecosystems by allowing more companies to get shots on goal and providing the help that sophisticated investors can bring.  They are continuing the work that great angel investment pioneers like Ron Conway who helped (and continues to help) great companies emerge.

As an investor at Spark, which currently invests out of a $360M fund, I am very excited about these guys.  Even though we also do seed stage investments, it’s great to be able to call on sophisticated seed investors that can partner with us and add serious value to companies on hiring, product marketing, and strategy.  These funds also bring a lot of excellent deal flow, and give companies great counsel on how to approach VC’ and how to hit the milestones that matter earlier.  This increases the pool of great companies that we have a chance to invest in and gives us greater leverage on the seed investments that we pursue.

UPDATE: Notch up one more exit for Harrison Metal – Google acquired Aardvark for $50M.

  • Author robchogo
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