The Re-Cap Fund. Getting more patient capital to some of the world’s greatest founders.
I hate wasted human potential.
But I see many great companies get killed simply because they haven’t kept pace with a VC timeline. Honestly…I see it all the time, and I know there are thousands of founders who would thrive with a more ‘patient capital’ model…
So here is a super counter-intuitive fund.
THE RECAP FUND
Has the stench of failure right? But could it actually be the greatest fund no one would buy?
The Goal is to keep more great companies in the world, make 3x plus returns and ensure a win-win deal for all. It is contrarian but makes so much sense. Would love to know if you think there is anything in it?
- There’s many companies who’ve started on VC path but, for whatever reason, need more time. Money doesn’t solve all problems and startup businesses are not sausage factories. Sometimes it takes non linear journeys to find the right path. I know of many many businesses on this middle ‘path’ that could still be mega with more time…
2. The ‘not quite keeping to VC path’ founders are generally tired ...they know they haven’t quite hit the metrics BUT remain super ambitious AND are frustrated as hell because they know they are closer than ever.
And here is the big irony:
just as they are about to die, they are the closest they have ever been to success after 2-3 years R&D.
3. Investors are wary when a business falls behind milestones. Even when it is due to factors outside a founder’s control ie market timing. VCs especially are herding beasts that hate the stench of failure (like all humans, by the way) and it is easier to pass when you have emotional drags like ‘sunk cost’ (if you’ve already invested) and ‘career risk’ (“what will my peers think if it goes wrong”?)
WHAT IF THERE WAS A NEW FRAME?
Enter the recap fund. It takes all existing data and reframes into an opportunity. The emotional baggage is removed, the cap table is sorted out and the founders re-energised.
The recap fund is all about creating a new dawn
The fund’s core starting assumption is that the only thing wrong with a business is the timeline they are following.
So instead of “you haven’t hit metrics for an ‘A’ it’s “wow I get to back the same calibre of founder at a seed valuation BUT with 2–3 years learning”.
NB Of course, there are many companies that do recaps now BUT there are many more that don’t because it is a hassle.
That’s the theory. Here’s the detail……
How the fund is positioned:
It makes a TOTAL BENEFIT of a recap. unapologetically so. Rather than assuming failure, it assumes the business simply hasn’t had time to succeed yet. It would be a super differentiated fund in a non differentiated world.
Existing investors have to have written the investment off mentally.
People who have taken VC style money previously. Would invest after seed and before an ‘A’.
It’s for founders who are tired and bashing against milestone based funding walls. They have found some form of product market fit but have run out of time. Their cap tables are “messed up”. They have spent years getting closer to break out success but cant get funding because they have fallen off the VC train. They remain as passionate as ever.
Would recap back to seed level, say £1m on £4m pre. Founders get enough runway for 2 years and a decent salary. The team get looked after.
Example ‘win win’ terms:
£40m fund. £20m base fund. £20m opp fund.
Initial cheque £1m per company for 20 companies (enough for 2 years runway). Follow on winners in opp fund .
20% for new money — £1m on £4m pre
5% for existing investors — enough to get them ‘money back’ outcome.
Salary of 10% over ‘competitive benchmark’ for founders to re energise.
Bonus for all existing people —again to re-energise
It would back, say, 20–25 companies in base fund.
You’d need to a group of investors that share your view of the world. They will probably tend to be good people who care.
Speak to every VC in the world and ask them “if you could recap 2–3 of the most ambitious and great companies in your portfolio” who would it be? (see Chris Tottman comment below). Simply pick the best from that bunch…
This is all just a draft. This is me playing. I sometimes throw things to the world that make sense to me to see if they are any good. Would love your thoughts on how to make it better……..is it so crazy? Would anyone buy it?
PS. INITIAL FEEDBACK
Chris at Notion — “Huge value leakage in the gap I call VPE – too messy for venture & too early for Growth/PE. Typically deals ranked 4,5,6,7 etc in VC funds. Its a massive opportunity for a specialist fund as all VCs with a 10+2 have the problem & it’s big..”
James Nettleton — the fund would get access to a bunch of companies most lazily pass on because they’re deemed not worth the effort or the heuristics lead to a quick passChallenge is “existing investors need to have mentally written off the investment”. Super hard to achieve consensus on that.
Hussein Kanji — Bullpen do similar — was tough for them to raise LP capital with this strategy because it is non-traditional.
Gil Belford Really interesting read Alex — I hope to see it become more than just a Medium post. ;-)