Menlo Ventures Says Small Is Beautiful For New $450M Fund

Xconomy San Francisco — 

Menlo Ventures, a Silicon Valley venture capital firm investing in tech startups since 1976, announced today that it closed a $450 million fund that brings its capital under management to more than $5 billion.

The new fund, Menlo Ventures XIV, will be devoted primarily to early-stage investments in both enterprise and consumer technologies. The firm’s core areas of interest include cybersecurity, fintech, cloud infrastructure, Web-based software, and consumer marketplaces such as Uber, one of the firm’s portfolio companies. But 20 percent of the fund will be invested in frontier technologies such as artificial intelligence, robotics, drones, and computational biology.

Menlo Ventures managing director Venky Ganesan says the firm had to turn some investors away to keep the fund at the optimal size.

“We could have easily created a fund in the $600-to-$700 million range if we had wanted to,” Ganesan says.

The firm set the fund’s size based on an analysis of returns on venture capital funds between 1976 and 2011, Ganesan says. Among the funds larger than $500 million, only 1.2 percent yielded three-fold net returns.

Ganesan says a more limited fund allows his firm’s nine investment professionals and other staff to sufficiently support and advise young companies.

“We are trying to shape and build iconic startups,” Ganesan says. “What that requires is time.”

Menlo Ventures plans to invest the new capital starting in early 2018, and continuing to the end of 2021. Ganesan says the firm expects to arrive at a “harvest” period of liquidity events (such as IPOs or acquisitions) between 2023 and 2027. Over the past five years, such exits among 33 of Menlo Ventures’ portfolio companies produced a total market value of $5.4 billion, the firm says.

Menlo Ventures has invested in Siri, acquired by Apple in 2010; Tumblr, acquired by Yahoo in 2013; and Dropcam, acquired by Google’s Nest division in 2015.

Fundamental shifts in technology are opening up opportunities to disrupt not only information technology, but also industry sectors such as transportation, hospitality, and financial transactions, Ganesan says.

“I’ve never been more excited about doing early stage VC,” Ganesan says.

Artificial intelligence is one of the transformative technologies that Menlo Ventures intends to invest more in, Ganesan says. Another frontier area of interest is computational biology. Ganesan says the time is right to move into this life sciences field because of two capabilities that are bringing the dream of therapies targeted for each individual patient closer to reality. The first tool: gene sequencing technology that can sequence the DNA of individuals for less than $1,000. The second: advanced gene-editing techniques such as CRISPR that make it possible to introduce pinpoint modifications into genes.

Information gleaned from DNA could make it more widely possibly to identify which individual patients would benefit from an approved drug, or an experimental therapy, Ganesan says. At this point, drugmakers often observe that even when a late-stage drug trial fails, some of the trial participants do seem to benefit. The trick is to figure out why, so that those likely to respond to the drug can be found among the larger patient population.

“That specific group of people might be in the millions,” Ganesan says.