New $500M Menlo Fund Targets Quickly Growing Startups With $5M To $10M In Revenue

Morning Markets: Say hello to Menlo’s newest fund, aimed at the middle of the venture market.

It’s widely agreed that the late-stage venture market had a strong 2018. With non-traditional vehicles like the SoftBank Vision Fund competing with private equity and growth-stage venture funds, there’s lots of capital for startups that are both large and quickly growing.

On the other end of the venture spectrum, seed has become notably diverse, with pre-seed taking the place of traditional seed, seed itself growing to old-school Series A proportions, and seed-extension rounds becoming de rigeur at startups working to meet the latest Series A requirements.

In between the two extremes, Menlo Ventures is betting that there’s an opportunity that it calls the “Venture Gap.” Let’s explore what it is up to.

$500M For Adolescent Startups

This morning Menlo Ventures announced a new $500 million capital pool called the “Inflection Fund” that it intends to use to power startups in their maturing years. According to the fund’s own notes, the half-billion-dollar lever will help startups spring up that are at the “early-growth stage.”

Menlo’s Matt Murphy is part of the new fund, which caught my eye as he’s someone that I’ve known since his time at Kleiner; Kleiner itself has a new $600 million fund (more on that here). The goal of the new fund, according to Murphy, is to find companies who can “accelerate [to] scalable, hypergrowth” with fresh external capital.

Per Menlo’s own notes, the Inflection Fund is looking for companies with what it calls a “beloved product,” more than $5 million in annual revenue but perhaps less than $10 million, and a grab-bag of other goodies: Top line growth of more than 100 percent (year-over-year), strong revenue quality (high retention, quick customer acquisition payback periods), and more.

That might sound like a pretty tall list, but it’s nothing out of the ordinary. Every VC wants a Series A company (the sort of shops the Inflection Fund might pick up for a Series B, it seems) to grow at 100 percent or more each year, to have good revenue economics, and feature a strong team. That’s effectively table stakes at the modern Series B and Series C stage.

What sets the Menlo fund apart from other venture vehicles, then? Perhaps the amount of money it is willing to invest in companies that have less than $10 million in annual revenue (preferably recurring). Hitting the round-number-arbitrary $10 million revenue mark opens doors for startups; many venture shops that invest at Series C or higher demand eight-figure revenue as a starting point.

So the Inflection Fund’s willingness to make “investments of $20 [million to] $40 million” into companies with less than that magical $10 million in revenue could carve out space for Menlo in the market.

It’s a notable wager as at Menlo’s stated range of investment, and the implied value of the companies targeted for investment (using their revenue as a proxy for valuation), the firm is hunting for larger stakes than have become normal in today’s founder-friendly venture market.

In short, Menlo is investing a bit more, a bit sooner, taking larger chunks, and hoping for larger eventual payouts for the extra risk it tolerated. It’s a sensible model provided that the venture firm makes good selections. How many of its bets hit the mark is the next question. We’ll see!