Founders Circle Capital Closes New Fund, Expands Investment Strategy

Founders Circle Capital, a San Francisco-based investment firm established nine years ago, has finalized its latest fund with $355 million in capital commitments. This brings the firm’s total assets under management to approximately $1 billion.

The company facilitates agreements with privately held, venture-backed businesses to acquire vested stock options from their founders and employees. This provides liquidity for personal needs, such as home purchases or increased financial flexibility.

Increased Competition and a New Approach

Founders Circle Capital operates in an increasingly competitive landscape. Competition comes not only from other secondary investment firms but also from active investors like Tiger Global, who frequently acquire secondary stakes. Furthermore, special purpose acquisition companies (SPACs) are accelerating the process of companies going public, reducing the need for early shareholders to sell privately.

In response to this evolving market, Founders Circle is introducing a new element to its business model: offering flexible capital to startups.

Insights from Founders Loveless and Dempster

Ken Loveless, co-founder, and Mark Dempster, chief people officer, discussed the new fund and current market observations in a recent Zoom interview. Key excerpts, edited for brevity and clarity, are presented below.

Fund Evolution and Investment Structure

TC: How does this fund differ from your previous investments?

KL: We have launched three primary funds, alongside approximately 17 additional entities, including co-investment vehicles and special purpose vehicles dedicated to investments within our existing portfolio companies.

TC: Can you elaborate on the shift in your investment strategy?

MD: We are now providing a combination of primary and secondary investment options, available at any time and in varying proportions. These investments aren’t restricted to specific financing rounds; we may engage in eight to ten separate investments related to a single company.

Impact of Public Market Access

TC: With more companies becoming publicly traded, has this altered the willingness of employees or founders to sell their shares in secondary transactions?

KL: We haven’t observed a substantial change in this regard. A portfolio company, UiPath, remained private for 16 years, and significant life changes occur over such a timeframe. Similarly, DoorDash and Poshmark each took nearly a decade to reach public markets. While some companies achieve public status within two or three years, the average time to IPO remains over ten years.

Competition and Long-Term Investment Horizon

TC: Given the competition for shares, including high offers from firms like Tiger Global, would you consider selling your shares to them?

KL: We maintain a long-term investment approach and have not sold any secondary shares. Our strategy is to hold investments through the initial public offering, focusing on companies with the potential for enduring, decades-long success. We intend to continue holding shares into the public markets.

TC: What is your typical holding period for shares?

KL: While not formally bound, we generally hold shares for an average of one year following a public offering before distributing them to our investors.

SPACs and Portfolio Exits

TC: How are you navigating the rise of SPACs? Are you exploring opportunities to invest in these blank check companies before they merge with companies you are tracking?

KL: We haven’t directly participated in SPACs, but several of our portfolio companies have merged with them, and we’ve benefited from these exits as a financing mechanism.

Investment Performance and Company Resilience

TC: Over the past decade, how many companies have you invested in, and how many have resulted in an exit?

MD: We have invested in 73 companies, with 31 achieving an exit.

TC: Have any companies in your portfolio ceased operations due to unforeseen challenges?

MD: We have experienced zero company shutdowns.

Valuation Trends and Market Dynamics

TC: How have valuations changed over the past year?

KL: Our analysis indicates that, when adjusted for growth, we haven’t seen a significant increase in the valuations we’ve paid compared to pre-pandemic levels. We are paying a comparable price for each unit of growth.

TC: What factors contribute to this stability?

KL: Companies with strong unit economics are improving their internal metric benchmarking, and investors are becoming more adept at understanding these metrics. The consistency and rigor of investor underwriting are also steadily increasing.