With competition for venture deals heating up, one area of the market appears to have been left behind: once-promising portfolio companies that have lost their venture capital or corporate sponsors.
Enter MBM Capital, a new venture firm launched on Monday by Lauren Bonner and Arun Mittal. The firm plans to invest in orphaned venture portfolio companies that are attractive turnaround strategy investments, despite the loss of their prior backing.
The fund launch comes at a pivotal time in the venture capital industry. Fundraising reached a record high in 2021, with PitchBook revealing in October that in the first three quarters of the year, U.S.-based venture firms raised $238.7 billion. Asset owners have good reason to be funneling capital into the strategy — for some of the best-performing endowments, the asset class drove outsize returns in fiscal year 2021, despite growing concerns about whether the venture party can last.
All of this fresh capital, however, doesn’t come without mistakes. MBM plans to invest in portfolio companies that were once seen as unicorns but that are no longer meeting their venture fund’s targets. “The VC investors aren’t able to spend a lot of time with their portfolio companies,” Mittal said by phone. “When they do, it’s companies that are experiencing massive growth. [The] companies that fall off the unicorn trajectory just don’t get any support from their investors.”
Mittal and Bonner began to notice this dynamic when they worked together with venture firm 1/0 Capital, where Bonner is a partner. Mittal served as a CEO for one of 1/0’s portfolio companies, which is how the two met. “A few years ago, we started to see this opportunity,” Mittal said. “We were talking to entrepreneurs who had raised capital and sold their businesses to larger firms. They weren’t growing as fast as their backers had hoped. They were calling for advice or help.”
Bonner is known publicly for suing Point72, her previous employer, for gender discrimination. The two settled in 2020.
“My biggest takeaway [is that] who you work with is critically important,” Bonner said via e-mail of the experience. For her, this lesson has translated into her work with MBM. “I’ve known Arun for almost a decade,” she added. “He’s a man of character, good humor, and honesty.”
The two had occasionally made one-off investments together, but it wasn’t until 2021 that they formally came together to build MBM.
The firm is still in its fundraising stage, which kicked off earlier this year, but the two hope to finish the process by the end of the year. According to Mittal, MBM had begun fundraising with a focus on family offices, as most first-round venture firms do. But in the process, institutions — including endowments, foundations, and pension funds — also made commitments to the fund.
Bonner and Mittal view their strategy as one that can offer diversification to an asset owner’s venture portfolio. “Some of the investors look at us as a special opportunity fund,” Mittal said. “What they’re looking at is a different way to invest in growth.” Asset valuations may not be as high as those in a venture fund that’s focused solely on growth, but according to Mittal, they can perform well, especially in a down market.
MBM is specifically planning to invest in fintech, HR technology, data, and e-commerce companies, Mittal said. Those businesses will already have developed revenue streams and products, as well as a management team that MBM can back.
According to Mittal, these so-called “fallen unicorns” typically need at least one of three changes to become successful again. “One [thing] we see is that when companies aren’t hitting their full potential, there’s typically an issue with management,” Mittal said. “There could be a missing executive, too many executives, or an underperforming one.”
Another change is trying to get businesses — especially tech and product-focused portfolio companies — to tilt more toward a sales or “go-to-market” mindset, while the third involves completely revamping a company’s business model. “The last one [is] a bit more [opportunistic],” Mittal said. “Sometimes there are opportunities to pivot or change the [model].”
Before they invest, however, there is still work to do.
“[Our] strategy will require two more investment professionals to source, diligence, and staff deals,” Bonner said. “As Ray [Dalio] would say, who you hire is the most important decision you can make. I love building teams, and this one is particularly special.”
Credit: Source link
