• Another Hardware Fund Emerges: Meet Root Ventures

    Root VenturesYou may have noticed: Hardware investing is in vogue. Andy Rubin, creator the mobile operating system Android, recently launched Playground Global to advise device makers in exchange for equity. Formation 8 is raising a $100 million hardware-focused venture fund. That’s saying nothing of the seed-stage fund Bolt, which raised $25 million a few months ago, and the numerous accelerators now focused on backing hardware startups, including Haxlr8r, Lemnos Labs, and Highway1, which is an offshoot of the custom design manufacturing company PCH International.

    Now, the Bay Area has yet another entrant on the scene: San Francisco-based Root Ventures, which just closed its debut, hardware-focused fund with $31,415,927 (the first 10 digits of Pi), capital that it raised from a gaggle of high-net-worth investors along with the fund of funds manager Cendana Capital.

    Root Ventures is a single-GP fund founded by Avidan Ross, a trained engineer who was previously CTO of the private equity firm CIM Group. Ross isn’t widely known (yet) in press circles, but a growing number of venture capitalists and entrepreneurs have grown acquainted with him through the roughly 10 bets he has placed in recent years with the help of his friends’ capital.

    Some of Ross’s older bets include Wallaby Financial, a mobile finance company that was acquired by Bankrate in December for an undisclosed amount. Another is Skycatch, an aerial robotics platform that received its first check from Ross and which has gone on to raise $24.7 million altogether, including from Google Ventures. Ross also wrote the first check for Momentum Machines, a company whose robots turn raw ingredients into packaged hamburgers without human intervention. It just raised an undisclosed amount of follow-on financing from Founders Fund.

    “I don’t think people were investing in me based on my individual track record as an angel,” says Ross. “Those investing in me know me from a previous life [as CTO] of a pretty large investment firm where I built a lot of great relationships with people who trust my ability to invest in great technology.”

    Ross, who raised much of his new fund late last year, has made three newer investments on behalf of Root Ventures, where he plans to make concentrated bets, and to write first checks in the range of $500,000.

    The most recent of its portfolio companies is operating in stealth mode, but it’s easy to see the appeal of the others. Mashgin — company Ross met through entrepreneur friends — has developed an automated checkout kiosk machine that employs computer vision to identify any object on a surface (down to the different-flavored Snapples, says Ross). The big idea: to create a far more seamless experience for shoppers.

    The company graduated late last year from Y Combinator and is about to announce a “significant” amount of follow-on funding, says Ross, who wrote its first check.

    Ross also invested in Prynt, which makes a smartphone case that prints out photos. He met the company during his honeymoon in China. The young company was operating out of the Haxlr8r accelerator in Shenzhen, “and I asked if I could take a three-hour break and visit with the companies. I immediately thought: ‘This is amazing.’”

    If you don’t understand why a printing up a digital photo might be interesting, Ross says Prynt’s opportunity goes “above and beyond printing out a polaroid. When you print a photo, you’re basically printing up the last frame of a 10 second video. With Prynt photos, you hand them to someone else, they point their phone at the photo, and the photo becomes alive [by featuring those full 10 seconds]. It’s like a Vine that only that person can watch. It creates privileged access.”

    Others must like it, too. Prynt recently raised $1.5 million in a Kickstarter campaign earlier this year.

    Ross says the company also just raised a “sizable seed round that’s unannounced. An earlier SEC filing suggests the amount is $2 million.

  • Waiting for Seed Funds to Sprout Cash

    sproutsOver the weekend, venture capitalist Marc Andreessen tweeted, as part of a broader conversation, that there are “definitely too many new small angel funds. That seems clear.”

    The comment kicked off a spirited debate on Twitter about small funds and their perceived merit. But if anyone knows what’s happening in the broader world of seed funds, it’s Michael Kim of Cendana Capital, a four-year-old investment firm that has made its name by backing micro funds, including Freestyle Capital, Founder Collective, IA Ventures, K9 Ventures, PivotNorth Capital, Lerer Ventures, SoftTech VC, and Forerunner Ventures. Kim, whose firm is managing around $90 million and is raising a fresh $55 million, talked with StrictlyVC yesterday about what he’s seeing.

    You’ve backed lots of micro VC firms. What’s your criteria?

    We look for groups that lead or co-lead their deals. There are plenty that just chip a bit into a seed round. But for us, it’s really important that the funds we invest in focus on ownership and on being the largest investors [in a startup’s seed round], as well as having substantial reserves. We’re looking for a firm that does three to five deals a year, putting in a million dollars [into each deal] and owning 15 to 20 percent.

    Most of your funds are in the Bay Area. Is that by design?

    We do think about the ecosystem: it has to feature high-quality entrepreneurs, high-quality co-investors, and lots of opportunity for follow-on capital. So L.A., for example, doesn’t have a good seed ecosystem; it’s too reliant on the Sand Hill Road crowd to fund its companies.

    More funds has meant more specialization. Is that a good thing or do some micro VC fund managers run the risk of backing themselves into a corner?

    I think it’s very important to stake out what your value-add is. Forerunner Ventures specializes in digital commerce, so pretty much anyone who starts in that space wants to meet with [founder Kirsten Green]. IA Ventures is known for being a big data investor; Founder Collective is known for being [comprised of] ex-entrepreneurs who want to help other entrepreneurs. Assuming it will become a much more competitive world, any seed fund really needs to think about its market positioning.

    How many micro VC funds are you aware of?

    A lot. When I started Cendana, the clear pioneers were Steve Anderson [of Baseline Ventures], Michael Dearing of [Harrison Metal] and Mike Maples [of Floodgate]; but I’ve probably met with or interviewed more than 260 groups since then, mostly in the U.S., because we don’t invest outside of the U.S., but also from Russia, Turkey, Berlin, China.

    It seems like many more micro VC funds are being founded by venture capitalists.

    A subset of them are definitely younger VCs from more established firms, which is an indictment of a lot of big firms that haven’t done enough about succession issues.

    Tim Connors [of PivotNorth] was at Sequoia and [U.S Venture Partners]; Chris Rust was at USVP and is starting a fund; Mamoon Hamid [also formerly of USVP] quit to join [former Mayfield Fund and Facebook exec] Chamath Palihapitiya at The Social+Capital Partnership; Aileen Lee left Kleiner Perkins to start Cowboy Ventures; Matt Holleran left Emergence Capital to start a fund [called Cloud Apps Management, which focuses on cloud business applications management]; Ullas Naik left Globespan Capital Partners to start [Streamlined Ventures, a seed-stage investment firm focused on infrastructure software]; Kent Goldman has left First Round Capital to start his own thing.

    Do you think VCs who launch seed funds have an advantage over ex-operators who launch seed funds?

    We think entrepreneurs have the most credibility with other entrepreneurs, because they’ve built their own companies.

    The one element I’m wary about is a lot of ex-entrepreneurs’ [experience]. A lot of them haven’t seen investing cycles, and one of the quickest ways to destroy a portfolio is through follow-on rounds – investing so that you suddenly have a $2 million hole instead of a $500,000 hole [from an initial investment]. So they have to have discipline about follow-ons, bridge financings and the like.

    How are all of these funds doing? Is it still too early to know?

    They look promising. A lot of the established players I mentioned [like Baseline Ventures and Floodgate] and older groups like First Round have promising portfolios. But in terms of returns – aside from [Baseline], which had a huge hit in Instagram – I suspect a lot of it is [high but unrealized IRRs]. Things have been marked up hugely on paper, especially if you’re in Uber or Pinterest. But LPs are very focused on cash returns, and while last year was a great year for venture firms like Greylock, Accel, and Benchmark, which returned substantial capital back to LPs, there aren’t a lot of seed funds that could say [the same].

    In the meantime, can things possibly remain as collegial as they have in past years between seed investors?

    A lot of new seed funds are relatively smart about focusing on ownership. At the same time, you can’t have four funds trying to get 10 percent [of a startup]. I do think we’ll see some sharper elbows.

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  • Seed-Stage LP Cendana Capital Looks to Raise $55M

    michael_kim_DV_20110104201014Cendana Investments, the San Francisco-based investment firm, has filed two Form Ds, for Cendana Capital II, LP and Cendana Investments, LP, with respective targets of $30 million and $25 million. (The forms are here and here.)

    Four-year-old Cendana has made a name for itself by backing so-called micro funds, including Freestyle Capital, IA Ventures, K9 Ventures, Lerer Ventures, and SoftTech VC. According to a source familiar with the firm’s thinking, Cendana Capital II, the $30 million vehicle, will continue to make investments in seed-stage-focused venture funds —  adding to roughly $90 million that the firm is already managing toward that end.

    Cendana’s first fund was a $28.5 million pool. It later raised a $60 million co-investment fund that Cendana manages with UTIMCO, called the Cendana Co-Investment Fund.

    In a new twist, Cendana is moving away from being strictly a fund of funds. The second fund that Cendana is now raising, — Cendana Investments, which is targeting $25 million — will make direct investments in startups.

    Cendana has yet to raise money for either of its newest funds, according to the filings.

    Cendana was founded by Michael Kim, who was among one of the original partners of Rustic Canyon Ventures, where he spent nearly a decade. Before joining Rustic Canyon, Kim spent about two-and-a-half years as an investment banker at Morgan Stanley.

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