I am delighted to announce the closing of PivotNorth Capital’s inaugural fund.
I’ve had the pleasure of being involved in four funds as a VC over the last 12 years at Sequoia and USVP, but this was my first time fundraising on my own. Two quarters and 25,000 miles of planes, trains, and automobiles later, we have a group of institutional LPs with whom I’m proud to be associated. Our investors are two university endowments, a foundation, three fund-of-funds, two family offices, and entrepreneurs with whom I’ve worked in the past. It is an awesome feeling of responsibility and gratitude I feel toward those who have put me in business to continue to do a job that I love.
There is nothing quite like the feeling of being a founder. While I helped build a startup into successful publicly-traded company as an operator and co-founded a company as a VC, this was my first true founding experience. This was the first time I kissed my wife and kids goodbye and headed out on the road on my own to try to convince folks I was worthy of their investment. I learned a lot about myself during the process and have an empathy like never before for what my fellow founders experience: the highs and lows of fundraising, the good meetings, the bad meetings, the folks who never say yes but never say no, the value of those who are willing to actually give frank feedback, etc. I will be a far better partner to founders as a result of this founding experience. I will also be a better investor. Spending about 100 hours in meetings with experienced limited partners helped clarify for me the model, our strategy, and our uniqueness.
Some folks during fundraising were surprised at the size of fund that my anchor investor and I agreed to raise. While it could have been much bigger, we set and kept the hard cap of $35M for fund one. To understand why we did this, it is important to cover a bit of history.
In the late 80s and early 90s, the typical top-tier VC firm was investing around $35M per GP per fund, with a small number of GPs. $35M of capital per GP was sufficient to fund a portfolio of companies at the early stage with check sizes driven by the needs of the business and the market opportunity. At times it might be a $3M check, at others, it might be $100k. If the VC owned twenty percent of a winner that generated a $250M exit, the LPs were making money and the GPs were making carried interest. Have a couple of those winners per GP and the fund yielded a 3X gross multiple to very happy LPs. Be fortunate enough to have one of those be a ten percent ownership position in an Nvidia, Cisco, Google, or eBay, and you might have a 20X fund. Capital was carefully allocated to allow founders pursuing markets worthy of being disrupted to hit important concept-risk eliminating milestones. When the milestones were hit, follow-on rounds if needed would be raised mostly from new investors at significant step-ups in valuation, minimizing dilution for founders and early-stage investors. LPs were happy, founders were happy, and GPs were happy.
While founders and the capital they require to eliminate concept risk haven’t changed dramatically since then, the venture funds that back them have. Many of the top tier funds whom were $100M and three GPs back then now have billions under management, are globally-focused, are multi-sector and multi-stage, and have dozens of investment professionals.
My anchor LPs were interested in a fund vehicle that allowed them to return back to that original venture capital model that worked so well for them. Enter PivotNorth Capital.
While folks call us a “micro VC”, our model looks like the top-tier VCs of old: $35M per GP, investing at the early-stage in extraordinary founding teams focused on disrupting large markets. We do a small number of investments per year and work side-by-side to help these entrepreneurs find capital-efficient business models. We are single-sector focused on software-based businesses, and prefer to invest in companies within driving distance so we can be actively involved.
Like the founders we back, my anchors and I want to build PivotNorth carefully so Fund I will be a single GP. I don’t see us ever getting to more than three GPs in future funds. We will add one CTO to the team with founding experience during fund I to code services to make us and our portfolio companies more successful. VCs fund companies frequently that help other businesses use data to be more efficient, yet rarely do VCs use data well themselves. We want to fix that.
We are not alone pursing this back-to-the-past model. Our friends at firms like Union Square, First Round Capital, True Ventures, etc have pioneered this category and while they could have raised much larger funds in their second funds, they have stayed disciplined and on strategy.
During my two quarters of fundraising, I continued to actively invest and warehoused a handful of companies for PivotNorth Fund I. I’m proud to be an investor in companies like Blekko.com for example, a machine-learning based search engine that recently launched. It is a great example of the profile we like: world-class technical founders we’ve known for years, pursuing a market worthy of disruption, with a business model that is a work-in-process but potentially quite capital efficient and high growth, and a frugality that allows us to work together to eliminate all remaining concept risk on my first check.
One of my favorite ways to help startups is to help them think about what questions they need to answer to get rid of concept risk, and bringing ideas of how to do it frugally with minimal founder dilution from my 22 years of experience as an operator and VC. If you are an extraordinary founder pursuing a market of size, we hope you’ll consider us as one of your financing partners.