Cendana Capital's Expansion into Nano Funds

Since its inception in 2010, Cendana Capital, a fund of funds manager located in San Francisco, has built positions in over 100 venture firms. Initially, the firm primarily focused on supporting managers raising capital of $100 million or less, even declining investments in well-known firms like Forerunner Ventures and IA Ventures as their assets grew substantially.

Adapting to Market Shifts

However, as the venture capital landscape evolved, Cendana founder Michael Kim began to adjust the firm’s strategy. Following a $278 million capital commitment last spring, Kim indicated plans to continue backing seed-stage managers while also allocating a portion of capital to pre-seed managers raising $50 million or less, and exploring opportunities with international managers.

Introducing Cendana’s Nano Fund

Now, Kim is introducing a new fund designed to broaden Cendana’s investment scope even further. The Cendana’s Nano fund, backed by existing Cendana investors, has secured $30 million in capital. This fund will target up to 12 investment managers currently assembling funds of $15 million or less. Kim believes the abundance of skilled individuals making smaller investments necessitates this strategic move.

The Rationale Behind the Nano Fund

TC: What is the core idea driving the creation of this Nano fund?

MK: The seed funding environment has undergone significant changes in the past 18 to 24 months. A new breed of investor has emerged – the “Twitter VC” – individuals with strong opinions and operational experience, though not necessarily large funds. We’re also seeing solo capitalists like Lachy Groom and Josh Buckley raising substantial capital, alongside the proliferation of AngelList rolling funds.

Addressing Capital Gaps

TC: Do you believe these emerging managers require additional capital beyond what is currently available?

MK: We believe we are uniquely positioned as the sole institutional limited partner (LP) focused on this stage. Many funds of funds, university endowments, and family offices typically require larger investment amounts, making them less suited for smaller funds of $10 million or less.

Investment Criteria and Goals

TC: What specific qualities are you seeking in potential investments?

MK: Our aim is to identify the next Lowercase Capital. Chris Sacca’s initial fund, valued at $8 million, generated a remarkable 250x return. Similarly, Manu Kumar of K9 Ventures saw his first $6.25 million fund return 53x. These smaller funds can deliver substantial returns.

Previously, we would assess fund managers and postpone discussions until they planned to raise a second, larger fund. However, we realized this approach caused us to overlook a significant segment of the market. The Nano fund was established to address this oversight.

The $15 Million Threshold

TC: Why was a $15 million limit established for fund size?

MK: Managing a $100 million seed fund requires check sizes of $1.5 million to $2 million, a highly competitive landscape. Not only are there numerous other seed funds, but larger firms like Founders Fund, Sequoia Capital, Lightspeed, and General Catalyst are also actively investing at the seed stage. Many managers prefer to remain smaller, writing checks of $300,000 to $400,000 to avoid direct competition with these larger players.

Ownership and Performance Analysis

TC: Are you concerned that larger players might overshadow these initial investments in subsequent funding rounds?

MK: Our analysis of over 100 portfolio funds within Cendana revealed a baseline ownership stake of approximately 15% for a $100 million fund, and 7.5% for a $50 million fund. Interestingly, our best-performing funds with $50 million in capital consistently demonstrated higher ownership, ranging from 10% to 12%. Smaller funds, on the other hand, are achieving ownership levels of 4% to 5%, exceeding expectations due to the expertise of their managers.

Initial Investments

TC: Which managers have you already backed through the Nano fund?

MK: Our first investment is in Form Capital, led by Bobby Goodlatte and Josh Williams. Both have extensive experience at Facebook, with Bobby leading the development of Facebook Photos and Josh co-founding Gowalla, which was later acquired by Facebook.

We also invested in Chapter One, managed by Jeff Morris Jr., a former senior product manager at Tinder and an active angel investor. They raised a $10 million fund, and we contributed a $2 million check.

TC: And a third investment?

MK: We’ve backed a third manager who has not yet finalized their fund, so I cannot disclose their name at this time. They were an early employee at Uber, responsible for leading their data teams.

Another compelling example is a manager who could likely raise $100 million but prefers to write smaller checks – under $500,000 – into promising data analytics, AI, and machine learning companies. Their experience and network of data scientists make them highly sought after.

Manager Focus and Criteria

TC: Given Chris Sacca’s full-time commitment to his fund, do you require these managers to dedicate themselves solely to investing?

MK: Not necessarily. With Nano, we are open to investing in individuals who may also hold full-time positions, which wouldn’t be suitable for our main fund. Our Nano fund has a broader scope and welcomes anyone seeking to manage $15 million or less.

TC: What are the essential criteria for investment?

MK: Regardless of the individual, they must possess investment experience and a demonstrable track record. Ultimately, we seek individuals with a unique advantage – whether it’s specialized domain expertise or a strong network. This could be an exceptional computer scientist at Carnegie Mellon, someone from Stripe, PayPal, or Facebook, or an entrepreneur based in Atlanta.

Future Plans and Expansion

TC: Given the current market conditions, how quickly do you anticipate deploying the $30 million fund?

MK: We have a robust pipeline of potential investments and anticipate significant interest. We are committed to evaluating every opportunity.

We are also exploring the possibility of collaborating with our existing fund managers to create nano funds for them. For example, a manager overseeing a $100 million fund could establish a $10 million nano vehicle, allowing them to write checks of $250,000 to $500,000. While they may not want to allocate a significant portion of their main fund to these smaller investments, a dedicated vehicle could prove highly beneficial.

TC: Would you provide a third of the nano fund to these managers?

MK: And their limited partners would contribute the remaining capital. I am confident they would be enthusiastic about such an opportunity.