Revolution Ventures announced today the close of its third fund, which it says was “oversubscribed” at $215 million.
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The Washington, DC-based venture firm (which we profiled in this piece in March) focuses on early-stage investing with an emphasis on companies located in “underserved” markets.
I hopped on the phone this morning with Tige Savage, co-founder and managing partner of Revolution, and he told me all about the company’s plans for the new fund. He also shared some details of the performance of its second fund, which closed at $200 million in 2013.
First, let’s start with the new fund. Savage said the firm intentionally opts not to raise larger funds because it wants to focus on quality over quantity. Its target with this third fund was $200 million but Revolution “flexed up a little” at the last minute to make room for an additional LP, he said.
“It’s easier to be a big fund. But we think this is the right size for us,” he told me, noting that traveling to other geographies in search of new opportunities takes “a lot of time and energy,”
“But most importantly, our philosophy is reflected in the way we underwrite. We stick with these companies through the good times and bad. Other firms tend to invest in a lot of companies and hope to get one massive outcome. It’s like buying a lot of lottery tickets,” Savage added. “That might be a perfectly good model for them, and a handful are really good at it. But we don’t want to invest in more companies than we have time to support.”
Instead, he said, Revolution’s portfolio is very concentrated with “an extremely low loss ratio.” Of the 18 investments made out of its second fund, Revolution saw five partial or full exits (notable all were Silicon Valley-based). Investments from its previous fund include Washington, D.C. area-based companies Framebridge and Homesnap, Milwaukee-based Bright Cellars, San Diego-based eSUB, Denver-based SRS Acquiom, Detroit-based Bloomscape (which we covered here), and Chicago-based Paro.
Looking ahead, the firm expects to make about 15 to 20 investments out of its new fund. According to Savage, Revolution typically invests $1 million to $12 million in initial financing, with an average of between $4 million and $8 million for an initial check.
Because the firm targets companies that are usually based outside of Silicon Valley, it’s seen “outsized” returns on its investments, according to Savage.
Why does location matter, you ask? Companies in those regions don’t often have access to a lot of early-stage funding and are often more capital efficient than their Silicon Valley counterparts, he said. Revolution is also able to invest at a more modest valuation.
“So even at moderate outcomes, because we invest thoughtfully and the companies usually don’t consume as much capital, we see quality venture returns,” Savage said.
While the fund is not sector focused, it does look for companies using technology “to attack existing billion dollar categories” as opposed to startups inventing new categories, Savage said. For example, one portfolio company, Framebridge, is challenging the traditional custom framing industry.
It’s also taking on companies that are in regulated categories.
“We consider ourselves to be Washington insiders and among our team there’s very strong government and regulatory expertise,” he said. “Plus, it’s impossible to make the argument these days that regulation isn’t important, from big companies to small. And that’s obviously true with a lot of the categories we attack as well.”
Revolution has yet to invest out of its new fund.
Blog Roll Illustration: Li-Anne Dias