Term Sheet — Thursday, February 28
'INVESTING IS HARD'
Good morning, Term Sheet readers.
“If I had to create a T-shirt for Mithril, it would say ‘Investing is hard’ on the front, [and] it and would say ‘Investing is really hard’ on the back.”
That’s what Mithril Capital’s Ajay Royan told Fortune in a recent interview about the venture capital firm he co-founded with Peter Thiel in 2012. You might remember reading about Mithril recently in a Recode story that described the firm as a “a slow-burning mess” that angered current and former employees, limited partners, and Peter Thiel himself.
My Fortune colleague Rey Mashayekhi conducted an in-person Q&A with Royan (who declined to comment for the Recode story). The story questions Thiel’s supposedly diminishing influence at Mithril; claims discontent among limited partners about the firm’s management fees; and describes Royan’s decision to move his 17-person firm’s headquarters from San Francisco to Austin, Texas, as unpopular among employees.
I found Royan’s answers rather confusing as they seem to be in direct contradiction with Recode’s investigation findings, but I’ll let you draw conclusions for yourselves.
Below is an excerpt. You can read the full Q&A here.
It’s been reported that Mithril has only deployed around $90 million of the $740 million raised through your second fund, which closed in January 2017. What are your reasons for the relatively deliberate deployment of capital?
People like to think [venture capital investing] is this, “20% a year for five years—that’s what you’re supposed to invest.” My view is, it should be like a rifle. If you’re walking around with a machine gun, you’ll just feel like you have to shoot a lot of bullets, and we should not do that. We just need to be slow and steady; that’s what we did with our first [$540 million] fund, and we’re doing exactly the same with the second fund.
I expect that the 2019-20 period will be the equivalent of the 2014-15 period for the first fund. We invested in Auris in 2014. I want to find the next Auris, and it’s going to be episodic and idiosyncratic, and that’s exactly the way it should be.
But you can’t say for sure when you expect to be fully deployed with the second fund?
That would be dangerous. I think any limitations on absolute returns is dangerous, because it creates a blind spot where there shouldn’t be one. It’s hard enough to do this. If I had to create a t-shirt for Mithril, it would say “Investing is hard” on the front, it and would say “Investing is really hard” on the back.
How involved is Peter Thiel in the day-to-day operations of the firm, given recent reports that he is “not operationally involved” in Mithril?
[Taps his cell phone] He’s right here all the time. Mithril’s been designed a little bit differently on everything, and one of the things that we designed differently was relatively centralized decision-making with a small investment committee. The investment committee has two members: it’s just the two of us. By definition, every single decision has to involve him; otherwise you can’t deploy the capital.
Peter is intrinsic to and has been a part of every single entry and exit discussion at Mithril. The way in which he and I have worked has functionally not changed in 15 years. The reason we have such a small committee is because we didn’t want to make decisions by committee; you want high alignment among those who are making the decisions. Cohesion and context is what we’re going for, and the ability to move fast—that’s our edge. You have to have an investment committee that has a ton of experience through market cycles and with each other, so you know what each other’s blind spots are. I wouldn’t presume to know what Peter’s blind spots are, but he certainly knows where mine are, and that’s critical.
You never invest alone; my advice to anyone doing this is do not invest alone, it’s a dangerous mistake. Someone as great as Warren Buffet has a Charlie Munger. I strongly believe that, Peter strongly believes that, and nothing has changed in how we operate.
What is the dynamic of your relationship with your limited partners at the moment? Have you heard any complaints about your management fees or your rate of deployment?
The single biggest point of feedback that I’ve had from our LPs is that they’re happy we’re very disciplined. We’re in an environment where things are getting deployed faster and people are raising faster. The single largest year for venture investing in history was two years ago, and then again last year, and probably again this year. LPs are feeling both excited and under pressure; they’re excited because the asset class has matured to a certain scale, and then they’re feeling under pressure at some level because funds are coming back for a lot more capital faster than anyone expected. In that environment, we certainly stand out as saying, “Wait.”
A feature of what we’ve done is that the largest single LP in both funds of our funds is Thiel. If you look at Mithril as a whole, the single largest investors are the founders [Royan and Thiel]—its like 20% of the capital. We have that much skin in the game, which is designed into our system. Every single decision we make, our limited partners understand that we are making these decisions as much for ourselves. It’s a very elegant way to set things up, because you’re doing nothing for your partners that you wouldn’t do for yourself.
Every single thing that we have done is designed to create higher returns, and there’s evidence that the body of work is maturing into that outcome for the investors—certainly, Auris is a somewhat spectacular exemplar of what we want to accomplish. We do all of this with what I would call an industry-standard structure. Our fees are 2% like anybody else; in fact, I would say many of the premium funds in the venture space would charge a little more, 2.5% on average. We kept it straightforward at 2% and calibrate it to performance. And we’ve actually had instances where we’ve even waived fees to our investors when we feel that we’re gonna be spending less than we need. So we’ve had no issues with LPs about any of this at all, because it’s standard and because the returns are well above standard, at least for now.
• Horizon Robotics, a China-based chip maker, raised $600 million in funding at a $3 billion valuation, according to Reuters. Investors include SK Hynix Inc, China Oceanwide Capital, Citic Securities’ One-Belt-One-Road Fund, and Minsheng Capital. Read more.
• Mirakl, a Paris-based operator of a SaaS-based marketplace platform for retailers, raised $70 million in funding. Bain Capital led the round, and was joined by investors including 83North, Felix Capital and Elaia Partners.
• Figure, a San Francisco-based fintech company that uses blockchain technology to provide home equity loans online, raised $65 million in Series B funding. Investors include RPM Ventures, partners at DST Global, DCG, Morgan Creek Digital, Nimble Ventures, Ribbit Capital and DCM.
• Contrast Security, a Los Altos, Calif.-based developer of security software, raised $65 million in Series D funding. Warburg Pincus led the round, and was joined by investors including Battery Ventures, General Catalyst, M12 (Microsoft’s Venture Fund), AXA Venture Partners and Acero Capital.
• Ionic Security Inc, an Atlanta-based software company, raised $40 million in Series E funding. JPMorgan Chase & Co. led the round, and was joined by investors including Google LLC, Kleiner Perkins, GV, Icon Ventures, Meritech Capital, TechOperators and Ten Eleven Ventures.
• Zūm, a provider of transportation and care for children, raised $40 million in Series C funding. BMW i Ventures led the round, and was joined by investors including NGP Capital, Volvo Cars Tech Fund, Clearvision, Draper Nexus, Sequoia Capital and Spark Capital.
• ClassDojo, a San Francisco-based consumer education brand, raised $35 million in Series C funding. GSV and SignalFire co-led the round, and were joined by investors including General Catalyst and Uncork Capital.
• Presto, an enterprise front-office software platform for the hospitality industry, raised $30 million in funding. Recruit Holdings and Romulus Capital led the round, and were joined by investors including I2BF Global Ventures, EG Capital and Brainchild Holdings.
• Cloud Elements, a provider of cloud-to-cloud application programming interface integration and aggregation services, raised $25 million in Series C funding. Mercato Partners led the round, and was joined by investors including Access Ventures, American Express Ventures, Grotech Ventures, Harbert Growth Partners, Rally Ventures, and Upslope Ventures.
• SpyCloud, an Austin, Texas-based provider of account takeover prevention solutions, raised $21 million in Series B funding. M12 led the round, and was joined by investors including Altos Ventures, Silverton Partners and March Capital Partners.
• Rockets of Awesome, a New York City-based children’s apparel company, raised $12.5 million in funding from Foot Locker, Inc. (NYSE: FL).
• VNDLY, Inc., a cloud-based work management system to power the new gig economy, raised $11 million in Series A funding. Battery Ventures and Hyde Park Venture Partners co-led the round, and was joined by investors including EPIC Ventures, Bowery Capital and the Cintrifuse Syndicate Fund.
• Datical, a database release automation company, raised $10 million in Series C funding. River Cities Capital Funds led the round, and was joined by investors including S3 Ventures and Mercury Fund.
• Rightway Healthcare, a New York-based enterprise healthcare platform, raised $8 million in Series A funding. The investors were not named.
• Little Spoon, a direct-to-consumer baby food company, raised $7 million in funding. Investors include Vaultier7, Kairos, Interplay Ventures, and SoGal Ventures.
• TeamApt, a Nigeria-based fintech company that provides digital solutions and payment infrastructure for Africa, raised $5.5 million in Series A funding. Quantum Capital Partners led the round.
• Sapling, a San Francisco-based onboarding and HR platform for medium-sized companies, raised $4 million in seed funding. Gradient Ventures led the round, and was joined by investors including Tuesday Capital.
• ShiftOne, an Arlington, Va.-based restaurant employee retention app, raised $2.6 million in funding. The Entrepreneurs’ Fund led the round, and was joined by investors including Bowery Capital and NRD Capital.
• Ikonopedia Inc, a Richardson, Texas-based provider of a breast reporting and tracking system, raised $2 million in Series C funding. Investors include Texas Women Ventures Capital.
• Coin Metrics Inc, a Cambridge, Mass.-based provider of cryptoasset market and network data, raised $1.9 million in seed funding. Castle Island Ventures led the round, and was joined by investors including Fidelity Investments, Highland Capital Partners and Dragonfly Capital.
• Attentive, a provider of software for sales teams, raised $1.2 million in seed funding. Mangrove Capital and Indico Capital Partners co-led the round.
• One Night, a same day hotel booking app, raised Series A funding of an undisclosed amount. SWaN & Legend led the round.
PRIVATE EQUITY DEALS
• WellSky, which is backed by TPG Capital, acquired Health Care Software Inc, a Wall Township, N.J.-based provider of integrated clinical and financial IT software for long-term and post-acute care providers. Financial terms weren't disclosed.
• Windjammer Capital Investors acquired Hermetic Solutions Group, a provider of advanced hermetic packaging and components. Financial terms weren't disclosed.
• Formstack, which is backed by Providence Strategic Growth, acquired Bedrock Data, a Boston-based provider of data collection products. Financial terms weren't disclosed.
• Spectrum Equity made an investment in Agilis Systems, a company focused on SaaS-based telematics and tracking solutions. Financial terms weren't disclosed.
• Boyne Capital and Grindstone Partners sold Fulcrum IT Services LLC, a Centreville, Va.-based information technology and government consulting company, to Huntington Ingalls Industries for $193 million.
• Stryker (NYSE:SYK) acquired Arrinex, a Menlo Park, Calif.-based medical device developer. Financial terms weren't disclosed. Arrinex had raised approximately $2.5 million in funding from investors including 7 Gate Ventures.
• Compass acquired Contactually, a Washington D.C.-based cloud-based software company that has built a customer relationship management system. Financial terms weren't disclosed. Contactually had raised approximately $17.8 million in funding from investors including Blossom Street Ventures, Moderne Ventures, Bull City Venture Partners, Rally Ventures, Square 1 Bank, and Correlation Ventures.
FIRMS + FUNDS
Genstar Capital promoted David Golde to managing director, and Ben Marshall and David Graham to director.