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NFX, a San Francisco-based accelerator program, announced today that it is launching its first institutional seed fund, which closed at $150 million. Limited Partners (LPs) range from endowments to founders and fund of funds, among others.
According to the NFX team, this won’t be your typical Silicon Valley seed fund, however. What partners James Currier, Pete Flint, and Gigi Levy-Weiss are trying to create is a new VC model powered by software. From sourcing good startups to the process of due diligence, the team is banking on engineering talent to fuel its investment strategy.
“As founders, we’ve gone up and down Sand Hill Road and round and round South Park, and the process is antiquated,” said Flint, in an interview with VentureBeat.
The cofounder of Trulia, an online real estate platform that was acquired by Zillow in 2015, joined NFX just under a year ago as an investment partner. He told VentureBeat that the fundraising process for NFX’s Fund I began shortly after he joined.
The partners have already launched one software-powered platform, called Signal, which connects founders to a diverse group of VCs, including Sequoia Capital, Accel, and Cowboy Ventures. It matches them based on the startup’s sector and stage.
Founded in June 2015, NFX — formerly known as NFX Guild — launched as an invite-only accelerator program, which provides startups with what it calls “network effects.” The idea is that connecting founders with the right mentors and investors will help them reach product market fit faster.
The accelerator has been investing out of its initial $15 million fund, which is backed by four big names in the Valley: Greylock Partners, Shasta Ventures, CRV, and Mayfield.
But the founding partners soon realized that they were limiting their investment opportunities by relying solely on their invite-only model, which saw startups graduating twice a year.
“The accelerator model is one specific model of financing,” said Flint. Now, with its new fund, NFX is opening up its investments to any startup that it finds interesting, thereby breaking away from the batch model it started with.
“One of the key principles as operators is speed,” Flint added. “Having this batch process was not conducive to who we are. When we meet great startups, we can now invest and work closely with them immediately.”
NFX isn’t dropping the accelerator model altogether, however. For startups that are in the very early stages, NFX will run a rolling six-month program of coaching and mentoring, which means founders won’t have to wait for an application period or start date. In addition, NFX will give $250,000 in exchange for equity (an exact figure wasn’t provided, but it would be higher than the 5 to 7 percent given in exchange for $120,000).
For seed and early Series A startups, founders will receive between $500,000 and $5 million in exchange for a 10 to 15 percent equity stake and will benefit from continued support until their exit.
The NFX partners seem to believe in their model, as they will not be taking management fees for the fund, instead choosing to invest their salaries in building a team of software engineers. So far, NFX has 12 engineers, and the firm plans on growing its team to 20 next year.
Other VC firms, like Correlation Ventures and Signal Fire, are also experimenting with software and data analytics. And Social Capital recently announced that it has launched a new model it labels “capital-as-a-service.”
Village Global, an early-stage VC firm, is also hopping on the bandwagon that promises to shake up the classic VC model. In a recent Medium post advertizing a CTO position, a cofounder and partner wrote: “It’s the biggest paradox: VCs focus on investing in innovative companies, yet the process of venture capital has barely changed in the last decade.”
Let’s hope NFX and others will lead the way into VC 2.0.
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