John Frankel is full of surprises.
Frankel, 55, a British-born, Oxford-educated chartered accountant who worked at Goldman Sachs for over two decades, now manages ff Venture Capital, a New York-based firm that specializes in early-stage investments. Instead of living off a Bloomberg terminal while peddling Goldman capital markets products to hedge funds, Frankel now trawls Austins South by Southwest (SXSW) conference and has invested in companies from TVs Shark Tank and Twitter conversations.
In 1999, while still at Goldman, Frankel began personally investing in seed stage companies. After getting washed out of Goldman in 2008 in the financial crisis, he decided to try seed investing on a more organized basis.
In difficult times, Frankel raised only $7 million or so, mostly from friends and family. Since then, however, he and his firm have rewritten what makes digital-age seed investing work, certainly on the East Coast. What they have learned is that it isnt just capital that makes for successful seed investing; its working closely with innovative entrepreneurs (many of whom lack business experience) to build sustainable companies of value.
The firm, which just closed its fifth fund, has performed well. The 2008 fund has annualized gross returns in excess of 20 percent. Funds launched in 2010 and 2012 have more than 45 percent returns. Ff now has $150 million in assets under management and has invested in nearly 100 companies, which have attracted significant follow-on financings. At last count, ff had assembled a network of more than 730 co-investors.
Ff has had some successes. In 2011, Santa Monica, Californias Cornerstone OnDemand, which makes cloud-based applications to recruit, train, manage and connect people across organizations, went public and raised just over $180 million. Valued at $850 million, Cornerstone is now worth over $2 billion.
The following year, ff sold Culver City, Californiabased Thinknear, which provides location-based and targeted mobile advertising, to Sunnyvale, Californiabased wireless location-based service company Telenav for $22.5 million. And in 2013, it sold Austin-based Infochimps, a big data provider, to Falls Church, Virginias Computer Sciences Corp. for 3.1 times its investments.
Frankel estimates that about 20 of ffs current portfolio of 69 companies are ready for the next financing round.
Ffs office in Manhattans garment district resembles an incubation space or avant-garde accelerator. Most New York incubators are simply shared workspaces, with no real guidance or direction. Ff operates differently. The firms principals are present, talking to entrepreneurs, problem solving, conjuring up new ideas. Our office is quite different than your usual VC, noted Frankel in a 2014 Reddit interview. No offices. Standup desks, fitness balls to sit on, and walls that you can write on.
The archetypal ff investment the firm says ff stands for founder friendly is New Yorkbased Distil Networks, founded by Rami Essaid, 33, a Syrian-born software engineer and graduate of North Carolina State University. In 2009, Essaid joined Neustar, a Sterling, Virginiabased technology company. There, he began working on a cloud-based website content-protection network with two fellow engineers, Engin Akyol and Andrew Stein. Like most geeks remote from centers of venture capital, they funded Distil themselves with money from family and friends.
The first evidence that Distil might be on the right track came when Brad Felds Techstars Accelerator in New York City invited it to join. Techstars doesnt have a lot of capital but has developed a reputation for showcasing promising entrepreneurs and technologies. A few months later Distil won SXSWs Interactive Hatch Pitch Competition. Suddenly, Distil found itself courted by VCs from both coasts.
Then Distils world caved in. Neustar sued Essaid for working on the project while still in its employ and argued it owned the idea. Potential investors disengaged. By the time the suit was settled, Essaid and his partners were broke and Distil was out of cash.
Thats when Frankel and ff Venture Capital stepped in. The firm provided the bulk of the next round of financing and supported Distil with accounting, design help and even engineering. Today Distil has 130 employees and has raised more than $33 million in equity and $10 million in debt. It also has revenue in eight figures, though Essaid wont disclose the exact number.
Four years after throwing a lifeline to Distil, Frankel and ff remain involved. I dont know of too many venture funds, early stage or late, that provide this kind of support to their companies, says Essaid. Most seed investors are trying to figure out how to profitably exit their investments, or, in later stages, worrying about how to raise valuations. Says Essaid, Ff is more concerned with value than valuation.
Ff may look like a hybrid, but in some ways its a throwback to one of the pioneers of venture capital, American Research & Development, the Boston-based firm launched in 1946. The founding genius behind AR&D was French native Georges Doriot, a longtime Harvard Business School professor. Unlike most current venture funds, including ff, AR&D traded on the New York Stock Exchange. With capital tight, AR&D limited investment in its portfolio companies to $50,000 each, unless the entire AR&D board approved.
Besides money, AR&D offered help. In its 1946 annual report, AR&D said it would assist in the procurement of personnel for key positions, and will endeavor to make available the best possible technical, marketing and administrative assistance. It proposes, in short, to play a continuing and active part in the enterprises in which it has invested.
The strategy paid off. A $70,000 investment in Digital Equipment Corp. that had to be approved by the board in 1957 turned into nearly $570 million after DEC took off.
Like AR&D, Frankel has assembled a team of non-traditional venture capitalists. Alex Katz, a partner and ffs chief financial officer, leads the accounting team and works closely with portfolio companies. He began his career as a lawyer. Adam Plotkin had worked for hedge funds and in Goldman Sachs leveraged finance group before joining ff as an entrepreneur-in-residence. Ryan Armbrust spent time at Columbia Universitys technology transfer office before joining ff.
The firm says its 29 professionals are dedicated to providing support and counsel on an ongoing basis. We arm our companies with resources in finance and accounting, PR and communications, engineering, recruiting, community management, strategic counsel and much more, Frankel noted in his Reddit posting. We provide all of these services to HELP management, not REPLACE it.
Helping its entrepreneurs has created some unusual opportunities. When trying to fill the role of director of communications at ff, we received around 500 resumes, brought in 50 people to interview and hired one, recalls Frankel. So we threw away the information on the other 499 applicants, not to mention the numerous hours of time and energy that went into the search.
Ff realized that many of its portfolio companies were looking for PR, marketing and branding help, and might find these candidates useful. The realization led to a start-up named Wade & Wendy. Candidates looking for jobs talk to Wade an artificial intelligence program that reviews skills and makes job-match suggestions. Meanwhile, Wendy, another A.I. program, interacts with recruiters and offers up candidates Wade has screened.
Wade and Wendy will increase productivity and efficiency to massive data sets that used to be analog and are now digital, says Frankel. We can actually enable people to find jobs and companies to hire more easily.
John Frankel, founding partner of ff Venture Capital
Frankel, with his shaved head, Oxford shirts and jeans, says he is often asked why he works in New York, not Silicon Valley. New York has a different sense of reality, he says. Start-ups tend to be more rooted in solving problems and creating sustainable businesses. Many entrepreneurs want to be close to their markets and to those who can help. As the center of global commerce, New York is an ideal testing ground for digital start-ups.
IT industry veteran Sunil Madhu says he must have talked to as many as 150 potential investors on both coasts to finance Socure, his New Yorkbased digital biometrics start-up, which provides real-time online identification. A number of Silicon Valley firms were interested but wanted him to relocate there. I didnt want to do that, he says. I wanted to develop the company and its products on the East Coast. Thats where my initial market is. Socures target market: financial institutions.
Ff Venture participated in a $2.2 million round with three other funds Abundance Partners, AlphaPrime Ventures and Archangel. Frankel became a de facto partner, helping Madhu with recruiting and marketing.
Two years later, as investors and entrepreneurs come to grips with identity theft and online fraud, Socure is emerging as a market leader though it has a long way to go before it generates a sizable return for ff.
Frankel cautions against expecting too much too quickly. While the high end of venture-backed companies unicorns such as Uber and Airbnb get huge valuations subject to wild swings, he believes that in the long term, small, reasonably valued companies have a better chance at delivering steady growth and above-average returns.
Steven Nutt, president of Moreland Management, a Cleveland family office, says he was attracted to ff because it was investing in digital media companies in a very disciplined manner. He felt the strategy promised more than investing in public companies or buyout funds. And it brought Moreland into contact with companies it normally wouldnt encounter.
Still, ff, like other seed-stage funds, hasnt broken through to institutional investors. Its story still doesnt resonate in an alternative-asset world where investors want greater liquidity and quicker distributions.
In 2015, venture capital in seed-stage investments rose 9 percent in dollars, but fell by 11 percent in deals, with $903 million going to 185 companies, according to PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report. Seed-stage companies attracted 2 percent of the dollars and 4 percent of the deals. The average seed-stage round in 2015 was only $4.9 million.
Angels, superangels, angel groups or multistage funds provided much of the capital. Only a handful came from specialists such as ff. Ffs challenge is to convince institutions that its investment style is unique and scalable enough to merit larger asset allocations. As venture capital searches for a way to systematically transform technology into sustainable businesses, some of the answers may reside inside a firm like ff.
Get more on alternatives.