• Bullpen Capital on Its New Fund, Post-Seed Deals, and Changing LP Sentiment

    bullpen capitalA few years ago, when three prominent operators came together to create a venture fund, Bullpen Capital, they figured they’d line up capital easily. Paul Martino has founded four companies, including the ad optimization platform Aggregate Knowledge; Richard Melmon cofounded Electronic Arts; and Duncan Davidson cofounded Covad Communications and SkyPilot Networks.

    LPs couldn’t care less. “We had meetings where we were hollered at for an hour,” Martino tells me of their lives in late 2010, when industry returns had sunk to a 10-year low. “Even though we were each running companies [through the late ‘90s and the 2000s], “it was like we’d wronged [LPs] by proxy. One guy even said to me, ‘Venture capital isn’t an asset appreciation class; it’s an asset destruction class.’”

    Fortunately for Bullpen – and LPs – times have changed. In a few weeks, says Martino, the Menlo Park, Ca., firm will hold a first close on a second fund that will ultimately be “between $50 million and $75 million,” up from its first, $25 million fund (about one-third of which came from Martino, Melmon, and Davidson). We talked yesterday about that new fund, and how Bullpen separates itself from the pack. Our conversation has been edited for length.

    You say you’re positioned to double, if not triple, your first fund. How have you won over LPs?

    Well, for one thing, we’ve made 33 investments, and four of them could [return] the whole fund [based on their IRR]. Also, LPs want to know how you’re going to differentiate yourself from the many other small funds they’re seeing, and we have a stage focus that only two or three other funds out there share.

    LPs also want to catch the next Mike Maples; they want to buy an option to get into your later funds. Instead of writing a $25 million check to one firm, they’ll write five $5 million checks with the hope that they might be able to give [the best of those small funds] $50 million the next time. There’s a fear of missing out, that they don’t have exposure to the best managers of the future.

    It seems like more firms are making follow-on investments in seed-funded startups. Venture51 is doing something similar, right?

    And they’re our best friends and most common co-investors. I’d hate if there were 23 firms doing what we’re doing, but we need partners and there just aren’t a lot of us doing this. When we’d learned Ronny Conway might be raising a fund to back seed-funded startups, I wrote him a note saying, “Welcome, please go do this.” Companies bumble and stumble, and we’re big believers in the power of strong syndicates. A few more of us would be a good thing.

    What’s your criteria? Does your interest extend to good teams that need to come up with a new idea?

    Investing in pivots would be like seed investing again. Instead, we invest in post-product market fit companies where big VCs say, “Come back in six to 12 months when you have a million users instead of 100,000.” We’re like an accelerator that gets the companies to the milestone that guarantees them the big round.

    What do you get in return for your check? Are you aiming for 10 percent?

    We’re like Greycroft Partners in that we have no ownership requirements – and that has helped us win 87 percent of the deals we’ve tried to get into. Sometimes, we [own] 3 or 4 percent; sometimes it’s 7 or 8 percent.

    You’ve told me you don’t take board seats, either. Does that concern LPs?

    LPs don’t like it but GPs do. Duncan and I have started 14 companies so we’re viewed as trusted advisors, rather than as a firm that’s going to potentially force the CEO’s hand. It puts us in a better position. We just led a round in an ad tech company and the week before one of its board meetings, I was asked, “What do you think the board is going to think of this presentation?” It’s a better situation to be in than the person who’s getting a distilled view of the company.

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