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SoftTech, the venture capital firm headed up by Jeff Clavier, is officially bulking up the “micro-VC” space to enter the investment world’s big leagues. The firm has closed investment on its third fund, Fund III, at $55 million — that’s more than triple the size of SoftTech’s Fund II, which had $15 million to allocate to startups.
I talked with Clavier last week to find out why SoftTech decided to go so much bigger with Fund III, how the new cash will be invested, and the larger tech industry landscape. Here’s what he said:
Moving beyond a one-man band
Clavier, who was trained as an engineer and spent years as a successful entrepreneur before becoming a VC, has established a strong individual reputation in Silicon Valley as a smart and savvy investor. He recently decided, however, that it was time to grow SoftTech into a real team effort. Clavier told me:
“Around mid-2010 I started thinking about Fund III should be, and I decided it was time for me to scale on two sides. One was on the size of fund, and the other was on SoftTech as an organization. I’ve essentially done everything since 2004 on my own, and I’ve closed close to 90 investments on my own. It was time for me to really bring a team together to really take advantage of the position I had built in the ecosystem.
So, last year I brought on my senior partner Charles Hudson, and recently we hired a senior associate, Stephanie Palmieri. We’ll be looking to bring on a third partner this year. To pay for that structure, you have things like management fees, which means you have to put together a bigger fund.”
Taking more control of each startup
SoftTech’s Fund I had less than $1 million invested and put about $25,000 to $50,0000 in each deal; the $15 million Fund II brought the average size up to $100,000 to $200,000. With Fund III, which initially launched in January 2011 with $35 million but ultimately closed its investment this month at $55 million, SoftTech is taking its investment size up another big notch: It expects to invest between $250,000 to $1 million in each deal. This will allow SoftTech to take a bigger stake in each company in which it invests, Clavier said:
“We’ll invest in 60 to 65 companies, with roughly $400,000 a piece on average. $25 million of the total new fund will be put towards the initial bite in these companies, then we reserve another $25 million to $30 million to participate in a select number of the follow-on rounds. We really think the value we can create in that Series B round is very interesting.
Basically, we’re shifting our strategy from just getting access to companies to having ownership. It’s really just having our investment size and ownership match the responsibility and effort we always put into our portfolio companies.”
If you want SoftTech funding, bring your business plan
With Fund III, SoftTech is moving well beyond the micro-VC strategy that typified its earlier funds’ investments. Clavier says he will continue to concentrate on his traditional areas of expertise — mobile services and infrastructure and consumer internet and e-commerce companies — but startups will have to prove themselves as worthy in a much more serious way to match the bigger investment size.
“We’re looking for startups who are focused on building real businesses very early on. I’d say 80 to 90 percent of our companies have a very clear business model, even at the seed stage of investment. They may not have proven the business model yet, but they will have a clear idea of how to validate that model within the life of the investment.”
Sitting beneath the incubator funnel
Clavier said he doesn’t see the current boom of startup incubators and accelerators as a threat to the more traditional VC model — instead, he sees it as a big opportunity. SoftTech will be looking to these programs as a sort of farm system to curate startups that are worthy of bigger investments from the likes of Fund III:
“The TechStars and AngelPads and Y Combinators are great for teams that are just coming together and have a product concept in mind. That petri dish environment that those guys can provide by bringing together super smart founders and surrounding them with very powerful mentors can accelerate and mature these startups in such a great way. Then when they come out of these accelerators, we can take a look at investing in them. If you mentally think about a funnel, we’ve just established such a great position at the end of it.”
The tech boom is just beginning
For all the talk of a frothy market in web startup investing, the folks at SoftTech see this as only the start of a huge growth phase for the larger tech industry. Clavier said:
“The opportunity that mobile and social provide to create these viral platforms is basically unprecedented. Then we add geo-location into the mix — just the fact that smartphones are everywhere now opens up opportunities to create companies that would have been impossible to make even five years ago. When you look at all these opportunities, it just made sense for us to really get to the next level in terms of fundraising so that we could be very serious in the types of investments we make in all these companies. We’re super excited, and we think this is just the beginning.”
Graph images from an infographic made for SoftTech by Visual.ly