Is the traditional VC model broken? This 'software-infused' firm just raised a $150M fund to fix 'medieval' process – GeekWire

Is the traditional VC model broken? This ‘software-infused’ firm just raised a $150M fund to fix ‘medieval’ process – GeekWire

Is the traditional VC model broken? This ‘software-infused’ firm just raised a $150M fund to fix ‘medieval’ process – GeekWire

The NFX leadership team: Pete Flint; Amy Lin; James Currier; Christen O’Brien; Gigi Levy-Weiss. Photo via NFX.

Trulia co-founder Pete Flint and his team at NFX think that the venture capital investment model is outdated — and now they’re doing something about it in the form of a $150 million fund focused on early-stage startups.

Bay Area-based firm NFX today announced its first institutional fund, which was oversubscribed and included participation from endowments, foundations, funds of funds, and more than 50 founders, investors, and several executives leading “unicorn” companies.

Pete Flint.

Founded in 2015 by James Currier (four-time founder), Stan Chudnovsky (Head of Product for Facebook Messenger) and Gigi Levy-Weiss (former 888 Holdings CEO), NFX has invested in 80 startups and operated an accelerator for the past two years, in addition to a membership program. One of the firm’s key differentiators is its focus on using software to help ultimately find better deals and help its portfolio companies succeed.

Now it is doubling down on this “software-infused venture platform” with the $150 million fund, which will be invested in more than 30 seed-stage startups across various industries and mainly located in the Bay Area and Israel.

Flint, who sold real estate data platform Trulia to Seattle-based Zillow for $2.5 billion in 2015 and joined NFX one year ago, told GeekWire that the process of how startups raise money is in need of a refresh.

“We think the core venture capital process is medieval,” Flint said.

NFX takes a unique approach partly based on what its leadership team — which includes Flint, Currier, and Levy-Weiss as managing partners — wished they had as company builders. The 12-person firm, made up mostly of engineers with plans to hire more, builds proprietary software that helps it find potential investments and support its portfolio companies. The idea is to help both the entrepreneur and investor.

“The level of dissatisfaction and inefficiency is massive,” Flint explained. “Founders go up and down Sand Hill Road meeting investors; similarly, investors happily state that they invest in less than one percent of the people they meet. Surely there must be a better way.”

In a blog post, NFX said it is “building software to improve and disrupt many of the processes within venture capital. Everything from identifying top companies, recruiting, diligence and fundraising.”

NFX is also developing technology to help its portfolio companies focus on “network effects,” which is representative of the firm’s name. Flint said companies like Microsoft, Google, eBay, Zillow, Salesforce, Airbnb, and Uber have all capitalized on this idea.

“It’s this notion that the more users a product has, that product gets better for all other users,” said Flint, who stepped off the Zillow board last year. “Going back 30 years, we see this as a driving force of returns in the technology industry — almost 70 percent of returns in technology investing have come from network effect businesses.”

Flint said that as technology continues to proliferate in our society, “network effects become more important as we look out on the next set of emerging platforms.”

NFX estimates that only 20 percent of tech startups have a true network effect built into their core. In a blog post, the firm further explained why it considers network effects so important for emerging companies:

“As we head into a future that is deeply networked, every part of our lives and economies will be inevitably transformed by networks – transportation, communication, commerce, health, wealth, entertainment, manufacturing, robotics, biology, and beyond. Founders who master network effects early-on will be more likely to build market-transforming companies. We have made a study of network effects for 15 years, and have developed playbooks for 13 types of network effects. We work closely with each of the companies we invest in to engineer network effects into their products and business models.”

Some of the firm’s software is available publicly — for example, its Signal platform lets entrepreneurs get introduced to the right venture capitalists.

Flint added that NFX also sees an opportunity to fund startups in their earliest stages. NFX plans on investing $250,000 to $5 million in 30-to-40 companies with the new fund.

“With a few exceptions, entrepreneurs aren’t being well served at the seed stage,” he said, noting that $150 million is large for a seed fund. “We think it’s the most formative time for companies, and there’s a gap in the market.”

There are other venture capital firms also trying to use more software and big data with their processes. The Wall Street Journal noted NFX this past April in a story highlighting firms that “hope to use analytics to gain an advantage over mere humans.”

NFX also isn’t alone in trying to go after seed-stage startups. Last week GeekWire reported about a secretive “scout program” run by Seattle-based Madrona Venture Group; over the past few years, several VC firms have launched similar groups. NFX itself uses a “network of scouts” to source deals, TechCrunch reported earlier this year.

CrunchBase News noted that there are an increasing number of “pre-seed” firms and funds created in part because the median size of a traditional “seed” round has increased over the past decade.

NFX plans to continue running its accelerator program, but will now invest $250,000 on a rolling basis and offer six months of structured, hands-on support.

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