Cendana Capital, a San Francisco-based fund of funds supervisor, has amassed stakes in additional than 100 enterprise companies since launching in 2010. For probably the most half, it did this by specializing in managers who’re elevating funds of $100 million or much less in capital, even foregoing stakes in beloved outfits like Forerunner Ventures and Uncork Capital as their belongings underneath administration ballooned effectively past that quantity.

But because the market modified, nevertheless, Cendana founder Michael Kim started to play with that formulation. Final spring, for instance, when he closed on $278 million in new capital commitments, he stated deliberate to spend money on the seed-stage managers he has at all times backed, however that he deliberate to funnel a small quantity of capital to pre-seed managers elevating $50 million or much less, in addition to to spend money on a sprinkling of worldwide managers.

Now Kim is again with a brand-new fund that sees him overlaying much more floor. Known as Cendana’s Nano fund, it has raised $30 million in capital from present Cendana backers to spend money on as much as 12 funding managers who’re piecing collectively funds of $15 million or much less capital. There are too many sensible folks proper now making smaller bets for Cendana to not make the transfer, he suggests. We talked with Kim concerning the fund — and the altering panorama extra broadly — in a chat has been edited evenly for size.

TC: What’s the thesis behind this Nano fund?

MK: The seed market has developed loads during the last 18 months to 24 months. You will have this complete world of Twitter VC, that means individuals who have loads of sturdy opinions and an operator-investor perspective, however who might not have substantial funds behind them. You will have solo capitalists like Lachy Groom and Josh Buckley, who’ve gone out and raised a whole lot of thousands and thousands of {dollars}. You even have the AngelList rolling funds. I believe there are most likely greater than 100 rolling funds on the market, and possibly 95% of them are [headed by] people who find themselves working on the massive tech or non-public tech firms, and it’s extra of a car of comfort for his or her pals to speculate alongside them.

TC: And also you suppose they want extra capital than is floating on the market already?

MK: I believe we’re the one institutional LP that’s targeted at this stage, as a result of as you realize, lots of the funds of funds and college endowments and household workplaces have to put in writing massive checks, so that they’re not going to be investing just a little bit right into a tiny $10 million fund.

TC: What are you on the lookout for precisely?

MK: The aim is to search out the following Lowercase Capital. Not everybody is aware of this, however Chris Sacca’s first fund was $8 million and it returned 250x. Manu Kumar of K9 Ventures — his first fund was $6.25 million and returned 53x. So you’ll be able to generate substantial alpha with these smaller funds.

Traditionally, we might meet with fund managers, and once they stated, ‘We’re going to boost a $10 million to $15 million fund,’ we have been like,’Okay, sounds fascinating. Let’s speak whenever you’re elevating your second fund.’ However we realized that we’re lacking out a whole phase of the market. So Nano was created to seize that.

TC: Why draw a line within the sand at $15 million?

MK: First, when you’re going to be working a $100 million seed fund, you need to be writing $1.5 million to $2 million checks, and that’s a brilliant aggressive area proper now, as a result of not solely are there different seed funds but in addition loads of companies — Founders Fund, Sequoia Capital, Lightspeed, Basic Catalyst — which can be very lively on the seed stage. We’re coming throughout loads of these managers who need to keep small, as a result of by writing $300,000 to $400,000, they’re not competing in opposition to Sequoia or Forerunner Ventures; they’re simply sliding into the spherical.

TC: Do you are concerned they are going to simply get washed out of that funding later by subsequent checks from larger gamers?

MK: Proper now, we now have greater than 100 portfolio funds inside Cendana, and we did some information evaluation. We appeared on the fund dimension, after which the typical possession of every fund. And it turns on the market’s a baseline of about 15% of a fund, that means when you’re a $100 million fund, the typical possession stake [you have in your startups] is round 15%. If you happen to’re a $50 million fund, the typical possession is about 7.5%.

We then checked out efficiency throughout our fund managers, and it seems that of funds with $50 million in capital — our better-performing funds — have extra possession than 7.5%. They’ve extra like 10% to 12%. Now, whenever you take a look at these tiny funds, when you’re a $15 million fund, 15% of that [should equate to] 2.2% possession, however we’re seeing that these tiny funds are literally getting extra like 4% to five% possession. They’re punching above their weight due to who’s concerned.

TC: Who have you ever backed thus far?

MK: The primary one is Type Capital, a fund from Bobby Goodlatte and Josh Williams. Each have been early at Fb; Bobby led the group that designed Fb Images and was later an [entrepreneur-in-residence] at Greylock. Josh cofounded Gowalla (acquired by Fb).

TC: How massive a fund are they elevating and the way a lot are you giving them?

MK: They raised a $15 million fund, and our technique is to [account for] 20% of [each of these funds], so we wrote them a $3 million test.

The second fund supervisor is Jeff Morris Jr.; he runs a fund known as Chapter One. He was a senior product man at Tinder and and an lively angel, and he raised a $10 million fund final yr into which we wrote a $2 million test.

TC: And the third?

MK: The third supervisor hasn’t closed the fund, so I can’t disclose his identify, however he was a really early worker at Uber and ran their information groups.

The final is an fascinating instance as a result of this particular person might most likely exit and lift $100 million, however to my level about not desirous to compete in opposition to everybody on this planet in writing a giant test, he’s content material to put in writing [sub $500,000] checks into fascinating information analytics and AI and machine studying firms, and everyone needs him concerned due to his expertise and his community of information scientists worldwide.

TC: When Chris Sacca dove in, it was his full-time job, I believe. Do you care if these managers are targeted solely on investing?

MK: No. With Nano we’re investing in individuals who may very well have a day job, which might not be a match for our major fund, however with our Nano fund, our aperture is wider. We welcome anybody on the market trying to handle $15 million or much less to succeed in out.

TC: Nicely, to be clear, you might have some standards. What’s it?

MK: Regardless of who we spend money on, they must have funding expertise and an funding observe file. What we actually search for on the finish of the day is an individual who has some form of benefit — whether or not it’s area experience or networks. So you might be a tremendous laptop scientist in Pittsburgh at Carnegie Mellon and when you’ve made some investments [we’d talk with you]. It could possibly be somebody popping out of Stripe or PayPal or Fb or an entrepreneur in Atlanta.

TC: A $30 million fund of funds goes to get dedicated fairly quick on this market. Is the plan to boost possibly one yearly?

MK: We’ve an unbelievable high of the funnel, and as you’re alluding, we’re going to be inundated. However we stroll in there and attempt to meet with everyone.

We’re additionally in discussions with our present fund managers to create a nano fund for [some of] them. So, you realize, think about certainly one of our fund managers, working a $100 million fund. Why not create a $10 million nano car with them the place they might write $250,000 to $500,00 test? They don’t need to refill their fund with these small checks, however you might see how, in the event that they have been to create this smaller car, it could possibly be very fascinating for them for a returns perspective.

TC: So that you’d write them a test for a 3rd of this nano fund . . .

MK: And their LPs would fill in the remainder. I’m certain they’d be excited to do it.