Homebrew’s evergreen fund goes against VC convention

The future of seed

The conventional wisdom for seed-stage venture funds is go big or go home. Many new emerging managers raise first funds of up to $10 million, then seek to raise ever-larger funds, grow their team and invest in more companies or larger deals.

That’s because in the longstanding startup bull market — no one seems to remember a down market — startups are raising ever-more capital in larger rounds at higher valuations. So seed funds need capital to compete and many LPs are happy to oblige.

Homebrew, a firm founded by Satya Patel and Hunter Walk, has decided to go another route. Its fourth fund is an evergreen fund, with capital from just Walk and Patel.

• While its original structure enabled the firm to provide key advice and capital at the earliest stages for companies like Plaid, Chime and Gusto, the current market has split off capital from counsel — some firms provide just a check and very little involvement. Now Homebrew will be able to invest at any stage, and remain invested in a company beyond its IPO. Profits can get recycled back into new startups.
• The structure also means Patel and Walk don’t have to return capital to investors by a certain time as with a traditional venture fund. They haven’t ruled out adding LPs to the fund in the future. For now, they can bring in LPs for an SPV at later stages if necessary.

Homebrew’s much smaller than Sequoia, but the comparisons are inevitable. Sequoia shook up the industry last fall when it said it would adopt an evergreen fund structure.

• Homebrew’s evergreen fund isn’t designed so that it will have a public portfolio like Sequoia — though that would be nice, Walk said.
• While Homebrew could have raised a larger fund, that was not the partners’ goal. It would mean spending more time managing employees or other things not related to working with founders. “Frankly I believe that the larger your fund, the more likely you are to be out of sync implicitly or explicitly with what early-stage founders need,” Walk said.
• And Walk acknowledged that he and Patel are lucky to be in a position that they don’t need to raise a larger fund just to generate more fees.
• Evergreen and self-funded funds aren’t new, but in a bull market it’s unusual to jump off the train.
• There are a few firms like Indie.VC (RIP) that have tried to create alternative models to traditional VC, but most haven’t worked.

Bigger isn’t always better. In an industry where billion-dollar venture funds aren’t surprising anymore, Homebrew’s move also highlights some of the less-discussed negative impacts of ballooning seed funds.

• The larger your fund, the more you have to invest. Plowing more capital into a startup than it needs can have many negative impacts, but few startups will turn down a larger check.
• And of course there’s the VC’s incentive: The larger your fund, the more management fees you take in. The economics of new seed funds can be challenging. A typical 2% management fee on a $10 million fund is $200,000 — not a lot for one or two partners’ salaries plus expenses in a place like San Francisco or New York. “But we never started Homebrew to be capital accumulators and have never optimized for assets under management as a business model,” Walk and Patel wrote in a blog post.
• Meanwhile, VCs will feel FOMO from their peers and competitors raising larger funds. With the industry performing well, few will jump off the train. “Everyone is being rewarded for the velocity of capital,” Walk said. “The VC product has excellent returns for endowments.”

There are some good reasons to raise larger funds. Here are a few.

• VCs need to compete with others, especially the Tigers of the world. Rounds are getting larger and valuations are higher. The exits are bigger which justifies bigger rounds. And insider rounds are now seen as a sign of strength, not weakness.
• Some want to build lasting institutional legacies. Others want to help train the next generation, which is hard to do with a small firm. (Homebrew has Screendoor, a separate organization that supports underrepresented groups in VC.)
• Some believe that startups in certain sectors need large checks or they won’t get funded at all — such as in synthetic bio or climate tech.
• Operating as a solo GP has been popular lately, but it can be a lonely endeavor.

Ultimately, few seed funds are positioned to make the move Homebrew did. But there may be a few more who move to an evergreen model or become self-funded. It’s a good opportunity to reflect on what your priorities are — and whether the traditional VC model gets you to your goals.

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