Term Sheet — Wednesday, September 5
5 Qs WITH A DEALMAKER
A venture firm called Hypothesis Ventures has formed to take advantage of a new $6 trillion opportunity — and that opportunity is found outside Silicon Valley.
Hypothesis plans to invest in early-stage tech startups in Opportunity Zones, a new capital gains exemption for people who make long-term investments in underserved communities. There are currently 8,700 designated Opportunity Zones in the U.S.
Hypothesis is one of the earliest venture firms to try to capitalize on this opportunity. The amount of capital eligible for reinvestment in Opportunity Zones is approximately $6.1 trillion.
An Opportunity Zone-focused fund allows investors to defer federal taxes on any recent capital gains until 2026, reduce that tax payment by up to 15%, and pay as little as zero taxes on potential profits from the fund if the investment is held for 10 years. At the same time, the influx of capital could help revitalize underserved communities across America.
The broader legislation, called the Investing In Opportunity Act, was part of Donald Trump’s tax reform package. The tax incentive is the brainchild of tech billionaire Sean Parker, who said it came out of a million-dollar bet with Peter Thiel.
“Peter Thiel bet me a million dollars that I wouldn't get it done," Parker told Forbes. "So that was part of my motivation."
Parker created a think tank called the Economic Innovation Group to lobby for the legislation. EIG focuses on the causes of inequity and the potential of using tax policy to force profits out of portfolios and into low-income neighborhoods. Parker told Fortune in May that “it had to be something that conservatives and progressive both liked, but in the end would lead to urban or rural renewal and drive investment in the poorest areas.”
Now, venture firms like Hypothesis are emerging to pump capital into early-stage companies in underserved markets. The new firm plans to invest in startups, build co-working spaces, and run accelerator programs all over the country. The average check size will range between $100,000 and $750,000.
“We see Opportunity Zones as one of the most transformative engines for economic growth, job creation, and innovation of our time,” Hypothesis founding partner Peter Brack told Term Sheet. According to data he cited from Pitchbook, Brack noted that 66% of the most recent U.S. tech IPOs and 72% of U.S. tech acquisitions were of companies headquartered outside of the Bay Area.
Brack declined to share financial details around the firm’s debut fund or its structure, but he spoke with Term Sheet about his plans to take advantage of this $6 trillion opportunity. Read the full Q&A here.
TERM SHEET: Describe your firm’s investment strategy and what types of startups you plan to back.
BRACK: We’re looking at a pretty broad range of domains from fintech, to healthcare tech, to agricultural tech, to AI, to enterprise software. I think the really interesting strategy across geographies is that many of these emerging cities may lack things like capital or mentor expertise, but many already have some historical existing specialty. So for instance, in the Midwest, ag-tech is already quite developed, and same goes for robotics in markets like Pittsburgh and Detroit. We’ll see that while the Bay Area will continue to play a key role in what’s considered the epicenter of innovation, other cities will become increasingly important entrepreneurial hubs.
How does this differ from what Steve Case is doing with the Rise of the Rest Fund that invests in underserved areas?
BRACK: The more the merrier in terms of who’s investing in non-Bay Area markets and, more specifically, in underserved markets. That’s a lot of ground to cover, and there are many companies out there that could benefit from expertise and domain-specific help along the way.
Genius and talent are equally distributed across the U.S, and we feel strongly that success should be too. The zip code of an entrepreneur should not determine the size or the impact of a startup.
Sean Parker said it wouldn’t surprise him if VCs started telling founders to re-locate into Opportunity Zones. Do you think we’ll see more startup founders moving out of the Valley and into these areas?
BRACK: Yes, I do. We’re already seeing that companies can exist anywhere. At Hypothesis, we believe that the future is already decentralized. Important companies and great founders live everywhere, and it’s about helping provide them with some of the tools. With the high-cost living in the Bay Area, it’s gotten really tough for early-stage companies to start and grow without a lot of funding.
In my opinion, the landscape has changed where we want others to see what we see. Amazon Web Services and others have made it far less costly and far easier to start a company anywhere. The playing field for entrepreneurship continues to level where location really shouldn’t matter. The next wave of really important companies will come from outside of Silicon Valley.
If everything goes right, the influx of capital will revitalize America's declining communities. But if it goes wrong, it could gentrify neighborhoods and drive out low-income residents. What do you think about that aspect of it?
BRACK: If I were a local community organizer, mayor or governor, I would much rather have a massive wave of capital coming into my district, city, or state, than not. Given where we are today with so many underserved communities that have been left behind, this kind of funding can do a lot more good than harm.
How long before we see a material change in some of these underserved markets?
BRACK: We’ll see. It’s hard to compare one underserved market to another. We’re talking about very diverse cities and geographies. One underserved market may be part of Culver City in Los Angeles, which is just adjacent to the thriving part of town. Whereas another may be a market adjacent to downtown Detroit where the economics are very different. But overall, when a company starts to grow, that’s when we see job creation, neighborhoods transforming, and transportation and city organization beginning to improve. There’s a ripple effect. These things take a long time, but with a company that takes off like lightning, it could happen really fast. It all just depends.
We’re all looking at this with the long-term in mind. As venture investors, we see everything in 10-year cycles, but I think even in the the first 10-year cycle, there’s a lot of good that can be done for founders, companies, and communities around the country.
Correction: Term Sheet yesterday stated that Hometown Food Co, a portfolio company of Brynwood Partners, bought The J.M. Smucker Co. That is incorrect. Hometown Food Co acquired a select portfolio of brands from The J.M. Smucker Co for approximately $375 million.
• ThinCI Inc., an El Dorado Hills, Calif.-based AI hardware startup developing computing platforms, raised $65 million in Series C finding. Investors include DENSO, its subsidiary NSITEXE, Inc, and Temasek.
• Launchmetrics, a New York-based provider of a marketing platform and analytics solution, raised $50 million in funding. Bpifrance led the round, and was joined by investors including Seventure, Cipio Partners and Famille C (Famille Courtin-Clarins).
• Miracor Medical, an Austria-based medical device firm, raised 30 million euros ($34.8 million) in Series D funding. Ming Capital led the round.
• Cricket Health, a San Francisco-based tech-enabled provider of integrated kidney care, raised $24 million in Series A funding. Oak HC/FT led the round, and was joined by investors including Cigna Corporation, LifeForce Capital, iSeed Ventures, Joe Montana’s Liquid 2 Ventures, Rock Health co-founder Halle Tecco, Virta Health co-founder Sami Inkinen, First Round Capital, Box Group, Nexus Ventures, Seven Peaks Ventures, Aberdare Management and LinkedIn CEO Jeff Weiner.
• Tresorit, a Hungary-based cloud encryption and collaboration company, raised 11.5 million euros ($13.3 million) in Series B funding. 3TS Capital led the round.
• Palmetto, a Charleston, S.C.-based clean energy tech company, raised $6 million in funding. Greycroft led the round, and was joined by investors including Lerer Hippeau, Box Group and NBA Commissioner Emeritus David Stern.
• Avid Ratings, a Madison, Wisc.-based customer experience company for homebuilders, raised $6 million in funding. Investors include 4490 Ventures and Beringea.
• Mejuri, a Canada-based fine jewelry brand, raised $5 million in Series A funding. Felix Capital led the round, and was joined by investors including Real Ventures, Incite Ventures, BDC Capital Women in Technology Fund and Dash Ventures.
• Bear Flag Robotics, a Sunnyvale, Calif.-based agricultural tech company, raised $3.5 million in seed funding. True Ventures led the round.
• The Inside, a New York-based direct to consumer furniture brand, raised $2.6 million in seed funding. Investors include Corigin Ventures, Lerer Hippeau and industry veterans Susan Lyne, former CEO of Martha Stewart, Maxwell Ryan of Apartment Therapy, Jenny Fleiss of Rent the runway and JetBlack and Alexa von Tobel of LearnVest.
PRIVATE EQUITY DEALS
• Thoma Bravo agreed to acquire a majority stake in Apttus, a San Mateo, Calif.-based provider of a middle office platform. Financial terms weren't disclosed.
• Offensive Security, a provider of online penetration testing training and certification, raised funding of an undisclosed amount from Spectrum Equity and TenEleven Ventures.
• Altamont Capital acquired The Bayou Companies, a New Iberia, La.-based pipeline coatings and insulation provider. Financial terms weren't disclosed.
• Vista Equity Partners acquired Spredfast Inc, a Austin, Texas-based provider of digital customer engagement solutions, and will merge it with portfolio company Lithium Technologies LLC. Financial terms weren't disclosed.
• Mason Wells acquired EastPoint, a Succasunna, N.J.-based provider of indoor and outdoor recreational sporting goods. Financial terms weren't disclosed.
• Ampersand Capital Partners acquired NEOMED-LABS, a a provider of clinical immunology laboratory services for biologics drug development, from the NEOMED Institute. Financial terms weren't disclosed.
• Belmont Instrument LLC, which is backed by Audax Private Equity, acquired HC LIFE, a U.K.-based provider of healthcare equipment to hospitals, medical professionals, and paramedics. Financial terms weren't disclosed.
• CORE Industrial Partners acquired Midwest Composite Technologies Inc, a Hartland, Wisc.-based provider of 3D prototyping and low-volume production services. Financial terms weren't disclosed.
• Carlyle Group acquired Noble Environmental Power, a Centerbrook, Conn.-based renewable energy company. Financial terms weren't disclosed.
• Atlantic Street Capital acquired OrthoBethesda, a Washington D.C.-based provider of orthopedic services. Financial terms weren't disclosed.
• Palantir Technologies, the Palo Alto-based data analytics software firm, is nearing an Ipo offering with Morgan Stanley as advisor, Bloomberg reports citing sources. Read more.
• Maoyan Weying, China’s largest movie ticketing service, filed for a $1 billion Hong Kong IPO. Tencent backs the firm. Read more.
• Club Med, the French resort chain, filed for a Hong Kong IPO that could raise up to $700 million, Reuters reports citing sources. Fosun backs the firm. Read more.
• Qutoutiao, a Shanghai-based news and video aggregation app, says it plans to raise $128 million in an IPO of 16 million ADSs priced at $8 apiece. It posted revenue of $78.1 million on loss of $14.3 million. Citi, Deutsche Bank, China Merchants Securities, and UBS are underwriters. It plans to list on the Nasdaq as “QTT.” Read more.
• The Carlyle Group will sell its majority stake in Getty Images, a Seattle-based provider of visual content, to the Getty family. The family is acquiring all of Carlyle’s 51% equity stake for about $250 million and rolling over about $2.35 billion of outstanding debt, according to The Financial Times. Read more.
• KKR acquired RBmedia, a Landover, Md.-based audiobook publisher, from Shamrock Capital. Financial terms weren't disclosed.
• H.I.G. Capital sold AMPAC Fine Chemicals, a Rancho Cordova, Calif.-based provider of active pharmaceutical ingredients and intermediates, to SK Holdings Co. Ltd. Financial terms weren't disclosed.
FIRMS + FUNDS
• Audax Group, a Boston-based investment firm, raised $3.5 billion for its sixth fund, Audax Private Equity Fund VI.
• Webster Capital, a Waltham, Mass.-based private equity firm, raised $875 million for its fourth fund, Webster Capital IV.
• Auxo Investment Partners, a Grand Rapids, Mich.-based private equity firm, raised $50 million for its debut fund.
• Sherpa Capital promoted Jorge Fernández Miret to partner.
• Tikehau Capital appointed Emmanuel Laillier as head of private equity.
• Battery Ventures promoted Paul Morrissey to principal, Viraj Parmar to associate, and Dan Nguyen-Huu and Dallin Bills to vice president.