This week I had the opportunity to talk with Brad Bentz, Principal at ATX Seed Ventures. ATX is an early-stage venture capital firm based in Austin, Texas. The firm was started in 2014 by Chris Shonk and about a year later Brad joined the team. Collectively, Chris and Brad make all investment decisions for the fund. Over the last three years, the firm has grown from one to six people, two of which were hired in the last six months. Out of their first fund, ATX made 16 investments and has already had 4 successful exits. For most fund managers, this is very hard to do especially within the first three years and especially when you’re investing in early stage companies. ATX is currently raising its second fund, which will ultimately be around $50M in assets under management (AUM).
What I found interesting about ATX was how they treat and engage their limited partners. For those of you who aren’t aware of this terminology, limited partners (LP) are the people whose money is actually invested in the fund. They are limited partners because even though they share in the profits of the fund, they have no say (or a very limited say) in what the fund invests in. In my experience, the general partner/limited partner relationships that I’ve seen are very straightforward: An LP invests in a fund, GP makes decisions, and LPs wait around for what’s next. Well, at ATX it’s a bit different. As an added perk, ATX put in place a VC sidecar fund that allows its LPs to make direct investments into the companies that ATX invests in through the fund. There are no fees for LPs to participate in the sidecar (also known as a special purpose vehicle) and for those who participate in the sidecar it “cross collateralizes” the carry they pay to participate in the main fund (which is a good thing). ATX absorbs all of the administrative and accounting costs associated with managing the sidecar. As a side note, at my firm, our LPs are able to make direct investments into our portfolio companies, but we don’t provide a special sidecar vehicle to accommodate the process. Perhaps this is something we should consider for our next fund.
ATX also hosts regular social engagement opportunities for their LPs. It’s not uncommon for most VC firms to have an annual or semi-annual event for their LPs, but since most of ATX’s LPs are serial entrepreneurs in the Austin area, they are able to engage with them on a more frequent basis. Brad and I didn’t discuss this during our conversation, but I would imagine having successful entrepreneurs as your LPs also helps with deal flow because they are probably very active in the entrepreneurial community which puts them on the frontline of discovery and innovation for new companies.
As their names describes, ATX is a seed/early stage VC firm. Their investment size ranges between $250K – $750K on a first investment, and they usually always reserve capital for follow-on investments. They have a two year recycle provision that allows them to reinvest the money they receive from profitable investments in the fund. ATX’s portfolio strategy consists of making investments in online marketplaces and B2B technology. All of their portfolio investments are in Texas which allows them to take a hands-on approach to managing their companies. We didn’t talk about their management fee or carry, but I’m assuming it’s a 2/20 structure (most VCs are set up this way). However, I have seen some creative fee structures at other funds that were outside the industry norm. For example, a friend of mine at Janvest Capital Partners (a fund that invests primarily in Israel based startups) structured his fund such that LPs pay a 4% management fee for the first five years and 2.5% for the next three years. This fee structure allows Janvest to have zero chargebacks to LPs (for additional fund expenses) and no portfolio company charges for due diligence and legal work.
In the world of VC, ATX would most likely be considered a Micro VC. A Micro VC is defined as a venture capital fund that has less than $50M in AUM and makes investments in the range of $25K to $500K. The rise in Micro VCs has risen at a rapid pace partly due to the shrinking number of traditional venture capital firms in the last few years. These types of funds can generally tolerate more risk and have been instrumental in funding the capital gap between angel investment and traditional venture capital. Given the ease at which startups are able to take advantage of technology to test and prove out their concepts, it’s not at all surprising that Micro VCs have been able to gain considerable traction in the industry and invest in solid, capital efficient companies that are able to go a lot farther with less money.
If you’re ever in Austin look up ATX Seed Ventures and get in touch with Brad or someone else at the company. They have an interesting story to tell about what they do, how they do it, and where they’re going as a firm. Cheers -KM