Ten Years and Counting

Greycroft LLC is pleased to announce that our latest venture fund, Greycroft IV, has officially closed. The fund is our fourth early stage fund since the firm’s inception in 2006, bringing our total capital under management to $800MM. As part of the new fund Ellie Wheeler, who has been with Greycroft for almost five years, was promoted to Partner, where she joins Alan Patricof, Dana Settle, Ian Sigalow, John Elton, and Mark Terbeek. We plan to make the first investments out of the new fund in January 2016.

We have come a long way since our first fund in 2006. Greycroft I was comprised of all individual investors and family offices. It wasn’t for another four years, in 2010, that we added institutional investors with Greycroft II. The original investors from our first two funds still account for roughly 2/3rds of our capital today.

Greycroft IV is a continuation of the same investment strategy that the firm pioneered almost 10 years ago. We continue to be one of the only VC firms that has no minimum ownership threshold and no board seat requirement, which has resonated well with entrepreneurs who all-too-frequently hear that VCs require 20%+ ownership. In addition, we have a syndicate-friendly approach and always bring in at least one institutional co-investor alongside us. This has been well received by other VCs and angel investors who frequently get cut out of their best seed investments by larger funds. Even when we are leading an investment we are happy to make room for other groups.

The challenge of our model is that it only works with smaller fund sizes. Greycroft IV is a $200MM fund, which we feel is the largest fund size that works with this particular strategy at this time. We made a commitment to stick to the $200MM level many years ago when we raised our first institutional venture fund and held fast to that promise.

If you read any of the trade press around venture capital you will see that the pressure to raise more capital is today’s siren song. It is not unique among fund managers and many entrepreneurs are facing these same pressures too. Our feeling is that at some point additional capital goes from being an asset to being a liability, because it has to be returned with a multiple in order to declare victory. We realize that staying small may be counterintuitive to some in the industry who believe that bigger is always better. In fact, on a per partner basis, our capital under management shrunk from $35MM to $33MM between Fund III and Fund IV.

In 2014 we broadly surveyed CEOs of venture-backed start-ups. The two most important features in selecting a venture capital firm were “Partner Reputation” (rated most important by 38% of respondents) and “Low Dilution” (ranked most important by 25% of respondents). Notice that “Valuation” was neither #1 nor #2 on the list. Our venture model is optimized against the top two criteria. Partners get a good reputation by being helpful, which we try to be at every turn. Partners also get a good reputation by being flexible, which requires abandoning arbitrary industry rules.

Our model has worked remarkably well in good times and bad, which is why we aren’t in a hurry to change it, despite the pressure to do so. With very modest capital employed we have experienced a number of very large realizations in companies such as Buddy Media, Huffington Post, Maker Studio, Trunk Club, and Braintree, not to mention existing portfolio companies such as Extreme Reach, AppAnnie, and The RealReal.

With our strong investment team, which now numbers 20 people between New York City and Los Angeles, and a consistent strategy for the past decade, we are looking forward to the next phase in Greycroft’s future.

The Illusory on Demand Economy