Thursday, June 25, 2015
Crosscut Ventures: Tapping Into The Promise of Silicon Beach, with Brian Garrett
Earlier this week, Los Angeles-based CrossCut Ventures (www.crosscutventures.com) announced its third, venture capital fund--a continuation of an investment theme very much centered around the growth of Southern California, and in particular, the Silicon Beach startup ecosystem. We spoke with one of the co-founders of CrossCut, Brian Garrett, ahead of the announcement earlier this week. CrossCut started as a tiny, $5M seed stage fund in out of the worst markets for startups and venture capital, in 2008, but has proven itself with some significant liquidity and success for its investors, including Lettuce (acquired by Intuit), Docstoc (also acquired by Intuit), Gradient X (acquired by Amobee), Dermstore (acquired by Target)--and a brand new, $75M fund.
Tell us about your new fund?
Brian Garrett: We are announcing two things. One is the launch of the $75 million, third fund for Crosscut, plus the official joining of Clinton Foy as our fourth managing director. Clinton was the former COO of Square Enix, a multi-billion game publisher.
Any change to your investment thesis from your last funds?
Brian Garrett: The fund is really continuing what we started back in 2008. But, from our point of view, is finally properly capitalized to build a great portfolio. We are looking to make 25 to 30 investments with our first bit of maybe a million dollars, in a typical seed stage of between a million and a half to $3M. We'll do about eight to ten deals a year, which will enable our four full time managing directors to have the time to work with our entrepreneurs, and help them hit milestones and attract follow-on funding.
You've seen some good exits in your portfolio recently, what do you attribute that to?
Brian Garrett: Our exits across the first fund, and some of the early exits in fund 2, were opportunistic, with strategic buyers who were looking for a particular team or particular technology. That was the case with Intuit buying Lettuce, and Amobee buying GradientX. The liquidity in Fund I has really just been about the maturity of the portfolio. That fund started back in 2008, and those companies are now six or seven years old. They've now hit critical mass, are profitable, and are growing at very nice rates. The buyers within those ecosystems and sectors are looking to find new avenues for growth and profit. It's a great sign that a lot of those businesses are here in L, and getting snapped up at a good price. That's a great validation of the ecosystem. For us, it's also nice to generate some realized returns for our first fund.
I don't think people are aware of the difficult beginning you had for the fund--are you surprised at the success you're now seeing?
Brian Garrett: Well, I guess we are proud we got to this point, but it was by no means an easy path. We raised $5M in august of 2008, on the belief and conviction that this ecosystem was going to develop. But, it took a few more years than we hoped, because of the big implosion in September of 2008. However, the thesis we had was correct, and it's really been a perfect storm of good returns, and good momentum in the market. But, mostly, from our point of view, it's been the quality of the entrepreneurs we've been fortunate to back along the way. You put all three of those things together, and really that has been the main factor that has contributed to this new, institutional LP interest in the Southern California ecosystem.
Any specific industries and companies you are looking at with this new fund?
Brian Garrett: We still describe this as investing in the DNA of LA. I think that's what we're most enthusiastic about. When we started this fund in 2008, that DNA was really ad tech and e-commerce centric. I think now, everyone agrees it's a much more diverse set of sectors and technology and business models. As a VC, that leads to a very interesting, diversified portfolio. That's where we're at, and we include software-as-a-service, e-commerce, ad-tech, mobile marketplaces, and gaming as our companies. Those are all sectors we have the background in, with the operating experience and partners, and which also happen to be the core expertise of Southern California.
Any lessons you've learned about the acquisition process, given your recent exits?
Brian Garrett: I think there is a common misconception with entrepreneurs, that every idea is a billion dollar opportunity. The same passion that drives entrepreneurs, has them sometime believing their business is more valuable than it really is. I think if you look at our exits, not a lot of those companies are household names. But they all built real businesses, and built real value, and found liquidity opportunity that made sense both for the entrepreneurs, and the amount of capital they had raised for their business. The lesson, I think, is to be conscious of the fact that the energy within the tech environment might not last forever, and oftentimes, a $40M, $50M, or $60M outcome is the best outcome for the business. That eliminates the risk of an extended plateau of value, if things are not achieved.
We have to ask, given the talk of a bubble, what are your thoughts there how we sit in Southern California versus Silicon Valley?
Brian Garrett: In general, we see the valuations around Southern California about fifty percent lower than the same style deal , with the same metris and traction, as Silicon Valley. But, I'd really put the "bubble" more towards late stage financing, versus early stages. The valuations being achieved by companies are a result of those larger funds looking to deploy significant amounts of capital, and are not always appropriate for where a business is at. The companies are benefiting from that, because they get the financing risk taken care of, but it's bad, because they might not be able to sell the company, and hit those next plateus of value creation. We're a bit nervous about the funding environment for our seed stage companies, who haven't yet gone out for their Series A, and we want to make sure they have enough money to get to the milestones to attract that funding. We anticipate seeing some softening in the market at some point, and though we're not capable of predicting when, we're nervous about the next year to 18 months, and making sure we have a strong syndicate of investors around our seed stage companies.
For the new entrepreneurs, what's the best way to approach you?
Brian Garrett: We consider our doors to be open, and we are throwing regular events throughout the tech ecosystem, and at our office in Venice. Obviously, the best way is a trusted referral, from someone we know, or who we've worked with, or a former entrepreneur or current entrepreneur in our portfolio. There's also a plethora of service providers we have relationships with, who are all great avenues to get to us, and get your concept and idea in front of us so we can set up a call or meeting.
Thanks, and congratulations on the new fund!