Los Angeles-based Crosscut Ventures (www.crosscutventures.com) is one of the newest venture capital funds in the area, and has quietly been working on funding local companies over the last year. The fund--started by Brian Garrett and Rick Smith--has been focused on digital media investments, and so far has made investments in six companies. The fund is just celebrated its first year in business, so we thought we'd catch up with Brian to hear more about what the firm is investing in, the challenges of raising a venture fund in this market, plus his view on the Los Angeles venture market.
Let's start with an overview of the fund. What do you invest in?
Brian Garrett: We started Crosscut Ventures about a year ago. We closed our fund in August of 2008. We're describing ourselves as a micro-cap venture fund, focused on digital media opportunities in the emerging ecosystem of Southern California. For us, digital media means consumer Internet, online advertising, mobile, gaming, and most importantly--this is Rick and my background--next generation infrastructure to support consumption of this media.
What do you mean by infrastructure?
Brian Garrett: It's analytics, it's delivery platforms, it's optimization of technology facilitating compression to delivery of video. It's analytics around users and visitation on web sites, and it's knowledge of the consumption of photos--for example, GumGum--or video images on the web. It's all that stuff that allows publishers and advertisers to better understand their user base and how to effectively monetize it.
Let's talk a bit about your background. Can you talk about your experience?
Brian Garrett: Rick and I worked together since 2001. We spent six plus years at a local firm, Palomar Ventures, doing Series A and Series B investments. In about 2005, I started looking at the local market, and realized that there are not lots of enterprise IT companies here, which is Palomar's focus. We started seeing deals like Intermix, LowerMyBills, Rent.com, Shopzilla--all of these successes started in SoCal--who had not raised money from local investors. Like any entrepreneur, we had the idea that there should be local capital, supporting the local ecosystem. About that time, the ecosystem became viable--we started seeing second time entrepreneurs starting their next business, and instead of seeing them head up to Sand Hill Road, we felt there should be a fund here that is easy to access, and guys who understand the landscape and know the players. We've been here a long time delivering that capital, in what has turned out to be an interesting market, underserved by venture dollars.
You mentioned you're a microcap fund--can you talk more about that?
Brian Garrett: There's been a lot of talk about how the venture model is broken, and funds north of $200M can't generate enough return in terms of value creation in their investments to even return 2x on the fund. If you do some rough math, if you have a $100M fund, you have to create $1 billion or $2 billion in portfolio returns to return 2x on capital committed. But, if you look at the last four or five years of data, there are far more exits in the sub-$100M range, by an order of magnitude, than companies sold for over $100M. The concept of microcap, is it's a smaller fund size--between $5 and $50M--and it puts in smaller investment amounts. For Crosscut, in our current fund, we typically put $100,000 to $500,000 in a first investment in a company. The idea, is you are finding more capital efficient businesses, because companies are easier to build than three years ago. You keep them lean, have meaningful milestones for dollars, and position them to raise additional capital--or never go out to the financing market again. In this case, a $20M, $30M, or $40M exit is a very meaningful return for an investor group and for the entrepreneur
So you're talking about smaller rounds?
Brian Garrett: to be very clear, our average deal size is $100,000 to $350,000 in our initial investment, up to $500,000. We syndicate our rounds so that we are typically raising $750,000 to $1.5M in initial seed funding for an early stage company.
How tough was it to start up a new fund?
Brian Garrett: Fundraising was absolutely brutal, and still is. We basically put some calls into friends--local entrepreneurs, guys we've worked with in the past, friends of the fund--and instead of trying to raise institutional money in a world that was collapsing, got them to put up a smaller chunk of money so we could show people what we mean by the opportunity in the market, so we can show our efforts as a fund and how we want to position the fund in the future. Fortunately, we closed in August, before it got really bad. But, there's no getting around it, fundraising has been incredibly brutal. That said, we're doing our best, and we've done six deals in the last 12 months, arguably one of the more active firms in this market. We're being very, very critical of opportunities, and trying to put together a good portfolio to increase our chance of raising a larger fund later.
What are some of your investments?
Brian Garrett: We were part of the initial angel round for Jason Nazar at Docstoc, and that was a case of just backing an aggressive, hungry young entrepreneur with lots of energy and an interesting idea. Subsequently, Rustic Canyon came in a Series A round. The next two deals were companies in a company in San Diego, Verve Wireless, and a local company here called GumGum. Verve we coinvested with the Associated Press, and they're up and running and aggressively growing the de-facto, standard mobile CMS for the newspaper industry. They've got some nice metrics behind them. GumGum was a seed deal, with First Round Capital, and they recently announced a Series A from GRP and Mark Suster. We also invested in a local company called Zadspace, with DFJ Frontier, and our first Norcal deal is an early employee at Tribal Fusion, who is starting a new business focused on monetizing Hispanic users across Latin America. The most recent deal we closed was a few weeks ago, an angel round with a group of LA angels and investors, in a company called Affordit, which is the firm of 5 time entrepreneur Wil Schroter.
How do you recommend that entrepreneurs approach you?
Brian Garrett: Rick and I are extremely approachable. We try to be respectful of every entrepreneur and their idea. We might not like the idea, but your next one might be brilliant, so we're responsive to every idea. Our contact information is on the Crosscut website. We try to do a good job of turning around and giving a good enough explanation of why we passed, if we pass. We know that you're only as good as your reputation is in the community. We've been here a long time, and we've working hard with our portfolio to engage and add value, to make introductions, and open up relationships, and help the company hit its milestones. That said, and most venture guys say this, but I'll say it again--it is best to have a warm introduction and to be referred in. We're very open to ideas that fall within our sweet spot, especially if it's something we know something about and can add some value. Otherwise, if we're just money, it's not the best scenario for us.
Finally, what's your opinion on where the SoCal VC industry is nowadays?
Brian Garrett: At the full macro level, venture capital is under attack. There will be less funds in the next few years. But, if feels like the microcap is one of the areas that is resonating. In terms of SoCal as a market, it's a shame. There are great groups down here, but they don't have the track record and history of the Sand Hill funds. In a tough fundraising environment, they're seeing greater scrutiny. They really need exits in those portfolios to justify their next raise. Venture is, unfortunately, shrinking locally at a time when innovation, ideas, and most importantly, seasoned entrepreneurs, have never been stronger.