Larry Cheng on the Birth of Volition Capital
While many pundits predicted that the financial crisis of 2007-2008 would lead to a big shakeout on the venture-capital stage, there’s been remarkably little change in the cast of characters so far, at least in Boston. But Monday saw the demise of one established Boston venture fund and the birth of another, as the entire crew of Fidelity Ventures, save two partners, announced that they have departed the Fidelity fold and formed an independent firm called Volition Capital.
Shortly after we wrote up the story yesterday, I was able to reach Larry Cheng, a former Fidelity Ventures partner who’s now one of four managing partners at Volition (the others are Andy Flaster, Roger Hurwitz, and Rob Ketterson). Cheng, a Harvard graduate who’s also spent time at Battery Ventures and Bessemer Venture Partners, has won a wide following in the industry through his blog Thinking about Thinking and his frequent tweets (at @larryvc). He filled me in about a few of the reasons behind the team’s departure from Fidelity and the structural details and the new investing focus at Volition.
Cheng says the firm—which will back companies using the remainder of the final Fidelity Ventures fund even as it starts hitting up outside investors to contribute to the first Volition fund—plans to be fairly picky about where it puts its money. It wants to invest only in established technology or services companies with $5 to $50 million in revenues; they have to be at (or close to) breaking even, and they must have founders who haven’t given up too much equity. To find out why, read to the end of the interview.
Xconomy: Congratulations on going independent. How long has this been in the works?
X: What’s the main reason for striking out on your own?
LC: The real driver is that the partners have had the aspiration to lead an indendent firm for some time. And we’ve always wanted to expand the sources of capital to include third parties.
X: When you put this spin-out together with the shutdown of Fidelity Equity Partners last summer, it begins to look a little like Fidelity wants to get out of the venture capital and private equity businesses. Was that a factor?
LC: That’s not accurate at all. Fidelty Equity Partners was in a completely different situation. They were closed in 2009 becuse there was no access to debt, which makes it hard to finance a private-equity operation. Fidelity is still very active in venture capital as an asset class, globally. They still have Fidelity Biosciences here, and there’s Europe, Indian, and Asia, where they’re also investing in the venture asset class. After this transition, there won’t be a Boston office or team doing venture investing for Fidelity, but they continue to be very supportive of the asset class.
X: Have you brought the entire Fidelity Ventures portfolio with you to Volition?
LC: I wouldn’t characterize it as “bringing it with us,” but the entire portfolio is covered under the sub-advisory agreement, yes.
X: How does that agreement work?
LC: The best way to put it is that we are managing the portfolio companies on behalf of Fidelity. The ownership structure of those companies remains unchanged.
X: What’s your capital picture for new investments—Have you started raising a new fund?
LC: We’ve been totally focused on completing the launch of Volition and completing the sub-advisory agreement, so we haven’t formalized our fundraising plans just yet. In terms of new investments, we still have capital in the existing fund to make new investments, so we are continuing to actively make new investments in the market.
X: So it sounds like you’ve brought a pool of capital with you from Fidelity?
LC: It’s complicated. I wouldn’t say that we have brought a pool of capital with us. The best way to phrase it is that we can continue to make new investments out of the existing fund, on the same course that we have in the past. The limited partners in the existing fund are all still Fidelity entities. If we made a new investment in the near term, it would come out of that fund, until Volition Fund One is formalized. Then after that point in time, all of the new investments will be Volition-funded companies with Volition LPs. So we’re kind of in this bridge phase.
X: In your announcement yesterday, you said Volition’s focus will be on growth-equity investments in companies that already have $5 million to $50 million in revenues, and that don’t necessarily need more capital, but could do important things with it. How much of a change is that from the investing strategy at Fidelity Ventures?
LC: We had been increasingly focused on that segment for several years, and now it will be the principal focus of Volition Capital. There had been some other types of investments, such as seed stage investments, at Fidelity Ventures, just decreasing over time. We don’t think there is another firm that is specifically focused on that segment of the market, and we think it’s a very vibrant segment.
X: Volition also says it’s looking for companies where the founders still have a significant ownership stake in their company—20 percent or more. What’s the rationale behind that?
LC: I don’t think we’ve issued an exact number, but we would like the founders to have a significant stake. It testifies to their commitment and passion for the company. But it also signifies that the company probably hasn’t raised a lot of capital—and, by virtue of that, that the company probably hasn’t spent a lot of money either. In other words, we’re looking for large, very capital-efficient companies. For the most part, those companies won’t have a long list of institutional investors already invested in them.
X: Have you transplanted the entire Fidelity Ventures team to Volition Partners, or were there some additions or subtractions along the way?
LC: Dave Power [a former partner at Fidelity Ventures] decided not to join Volition. He will be starting a consulting firm to serve technology companies, but he will continue to collaborate with Volition as well. The only other nuance is Simon Clark [another former Fidelity Ventures partner], who ran the European team. He is staying internal at Fidelity and running a new fund for Fidelity called Fidelity Growth Partners, focused on European venture investing.
X: You mentioned a moment ago that Fidelity is still supportive of venture capital as an asset class, and you pointed to Fidelity Biosciences and the company’s venture funds in Europe and Asia. Is there a chance that Fidelity could get back into the technology venture investing business here in the United States, and create a fund that would wind up competing with Volition?
LC: They don’t have any current plans to rebuild the team and the office in Boston. They certainly have the option to do that, and they may or may not do that down the road. Whether we are competitors or not depends on the focus of that entity, if it were to become a reality.
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