It’s the worst kept secret in the world of startup funding. Series A rounds today are the equivalent of what used to be called Series B rounds. The checks are bigger, but so are the expectations around revenue and traction.
That shift has created more of a vacuum for seed-stage companies. While there are plenty of individuals willing to plug money into nascent startups, and no shortage of micro VC funds focused on them, there is a shortage of funds with the kind resources typically reserved for outfits that are picking up momentum. Think recruiting, HR, marketing, community building.
You might not think a budding company would need all of these pieces. But NFX, a now four-year-old, San Francisco-based investment fund, argues that they do. And toward that end, it has persuaded investors — foundations, endowments, and 50 individual investors — to provide it with $275 million in capital commitments for its second fund just one year after closing its debut fund with $150 million.
These investors seem to be buying into a number of things when it comes to NFX, which was originally founded as a kind of accelerator program for startups growing so-called network effects businesses. The idea, broadly, was that the more users a product has, the better the product becomes for future users.
Last year, NFX decided to ditch the accelerator piece and restructure as a more traditional venture firm. But its focus on network effects still very much defines the firm, largely because its founders have all created businesses that have grown via network effects in their own careers. Its three general partners — James Currier, Pete Flint, and Gigi Levy-Weiss — have been involved in the founding of the social network Tickle (sold to Monster.com in 2004), the home buyers’ site Trulia (which went public in 2012), the online travel site Lastminute.com (which sold to Sabre in 2005), and the social casino game publisher Playtika (acquired by a consortium in 2016).
Stad Chudnovsky, who cofounded NFX but is today an advisor (he’s a little busy as the Head of Product for Messaging at Facebook), also helped build Tickle, as well as worked formerly as a top exec at PayPal.
Indeed, in addition to helping “get everything in place” for seed-stage startups (the recruiting, the HR), NFX says it also works closely with the startups it funds to figure out their network effects.
As one example, the firm was among the earliest investors in Outdoorsy, a fast-growing platform that allows customers to book privately owned RVs and trucks. But Outdoorsy looked very different when it came to NFX. While it wanted to create a two-sided marketplace and cofounder Jeff Cavins, a serial entrepreneur, had already invested millions of dollars trying to figure it out, Outdoorsy was initially focused on the adventurers who would use the platform. NFX helped the company recognize that it was really a supply-side marketplace and that it should develop a SaaS product for the supply side of the market, meaning the RV owners. From there, says Currier, “We came up with a plan about what features to build and how to roll it out.”
Currier says that NFX similarly helped another of its portfolio companies, Mammoth Biosciences, a two-year-old, San Francisco-based CRISPR-based platform for disease detection that looked dramatically different when its founders, Stanford PhD students, first met with NFX.
They had an interesting idea, to create a kind of platform that would ensure through DNA testing that fish being sold is what it’s being claimed to be (there’s a lot “imposter” fish being bought and sold every day).
It isn’t a huge market, though. NFX thought the team could go bigger, so the team met with NFX every week and they collectively decided over time to look at another technology, CRISPR, the technique that allows scientists to make precision edits to any DNA, but that also acts like a search engine for nucleic acids — which has many business applications.
In fact, with NFX’s help, the founders decided to go after diagnostics and therapeutics and to develop a kind a two-sided network by licensing key CRISPR intellectual property from UC Berkeley biotech labs like that of Dr. Jennifer Doudna. Before long, Doudna herself (widely known as a pioneer of CRISPR) came to like the idea so much that she co-founded Mammoth.
Soon after, NFX co-led the company’s Series A round with the venture firm Mayfield. “We helped bring all that together,” says Currier.
Of course, both Outdoorsy and Mammoth Biosciences are young companies. It’s too soon to know if they’ll scale up the way that NFX envisions they will. Still, they look like solid bets, as do some of the outfit’s other portfolio companies, including Ribbon, a startup that underwrites potential homebuyers using its own data system to predict whether a buyer will be eligible for a mortgage and for what amount. It gathered up $225 million in Series A equity and debt seven months ago.
NFX was also among the earliest backers in Lyric, a hospitality platform for business travelers that recently secured $160 million in equity and debt funding; Zeus, a startup that invites homeowner to rent space to business travelers (it just raised $24 million in March); and Firefly, a startup that allows ride-share drivers to make money through digital advertising. (It closed a $21.5 million seed round in December.)
No doubt, investors are also encouraged by the personal track records of Currier, Flint, and Levy-Weiss, including their bets on Lyft, Patreon, and Poshmark, among others. Flint tells us that over time, the team has invested in more than 300 startups altogether, across many sectors and numerous geographies.
As for how the new fund will be spent, the idea is to write initial checks of between $1.7 million and $2 million, with the occasional, bigger check reaching to upwards of $4 million or $5 million.
Many of their bets are on U.S. companies, but because of Levy-Weiss, who is based in Israel, roughly one-third of the fund will be invested in Israeli founders, either living in Israel or in the U.S. (“Gigi is at the center of everything in Israel,” insists Currier.)
The firm will also continue working closely with startups — typically until they are 18 months old or, if it happens sooner, until the startups raise their Series B rounds. The idea is to meet with each of them every week for six months “to ensure they get the support they need,” says Flint. After a year-and-a-half, the partners step away to free themselves up for new commitments.
In the meantime, Currier, Flint, and Levy-Weiss also plan to keep networking like mad, through brunches they’ve been hosting for years, dinners for their CEOs and founders, and sector-specific summits, among other initiatives. While NFX prides itself on helping generate network effects for its startups, it very much believes its own chances of surviving and thriving rely on expanding its own network effects at all times. “It’s a lot of work,” says Currier with a smile, “but venture capital is a networks effects business, too.”