Will Seed Funds Be Multigenerational?

“There are now more seed funds whose names begin with the letter ‘F’ than there were seed funds [in total] when we started our firm!” A great line uttered at dinner last night by one of the senior GPs at one of the best early stage funds. Also, a partner who is transitioning into a non-FT role going forward.

Photo by Rod Long on Unsplash

One question that’s been on my mind since we started Homebrew in early 2013 was whether seed venture would end up being multigenerational or not. It’s a question that, even six years later, is still unanswered. The first real institutional funds in this segment of the market are starting to reach the back half of their original partnerships – where some combination of age, wealth effect, changes in personal goals, etc have started the transition. New GPs are hired or grown, and in several cases, the bench strength seems to be there. In others, TBD.

You also have a version of strategic expansion (or scope creep if you’re less kind), where some firms started as focused 1-2 GP shops but are now 3-7 GPs, with operational staff and increasingly large fund sizes. They become platforms and the goal/need to look more like a multistage fund plays out in their portfolio model – 20% ownership targets, entering at A round instead of just seed. Again, none of these evolutions are bad (or good) per se, just the nature of fund stewardship and the winner’s curse.

But once you’ve upsized, can you ever go back? Usually not – too much complexity. As Fred Wilson says:

When Satya and I started Homebrew we did so without a succession plan. Not just because it would be premature but because our thinking was that when we’re done, Homebrew is done. Now hopefully this isn’t for quite a while – my standard joke now that we’re on Fund 3 is that Homebew is “post viable, pre excellent” – and as the owners of our business, we get to revisit this decision, but it helps to keep us focused on our primary job: investing in and supporting great founders. Not recruiting new Partners, not chasing LPs so that we can raise several hundred million dollars more next time around.

Some of the seed investors that I enjoy working with most are sole GP firms. My guess is that when they’re done, they’re done. Some of them could have “wealth effect retired” a while ago – or maybe we need to wait for the 2019-2020 IPO boom 🙂 – but they’re doing this because they love founders. When they’re done will we have a replacement class of seed firms that (a) stay small and focused, (b) lead rounds, and (c) are institutional LP backed? Or will there be an early stage bifurcation into multi-GP platforms and smaller syndicate-sized funds. In the 2020s will Homebrew be an anomaly? And will the needs of VCs drive these changes or the needs of founders? If it’s the latter, I feel great about Homebrew’s future, even if we’re planning to turn off the lights when we’re done (MANY MANY YEARS FROM NOW) rather than hand the firm off from Satya and Hunter to Susan and Heather.