Last month, capital volitionA Boston-based 13-year-old, 30-person growth equity firm, announced it closed its fifth fund with $675 million in capital commitments, bringing its total assets under management to $1.7 billion.
While most venture capitalists will tell you they had no problem raising their newest fund, Volition co-founder Larry Cheng, an alumnus of Bessemer Venture Partners, Battery Partners, and Fidelity Ventures, says that wasn’t his experience. while trying to raise the latest company vehicle. In the fourth quarter of last year, he says of Volition’s limited partners: “I don’t think anybody really knew, not even the people we were interacting with, if they could get in for the amount they originally wanted or if they were going to get in. absolute.
That they turned up with their checkbooks is not surprising. Among Volition’s other outings, the firm invested early in pet marketplace Chewy, which it later sold to PetSmart for a whopping $3.35 billion in 2017 before selling to other buyers in 2020. Indeed, Cheng, who remains focused on the Internet and consumer offers. while other of his partners are more focused on enterprise software, he has remained so close to the founder of Chewy and meme-stock king Ryan Cohen who is on the board of GameStop, which Cohen chairs.
A few days ago we talked a little with Cheng about that friendship. We also talk about some of Cheng’s more current contrarian bets, like ad tech. Our chat has been edited for length and clarity.
TC: It was a long time ago, but Ryan Cohen has said that Volition backed him at a time when no other VC firm was returning his calls. Why did you invest in it?
LC: Ryan was incredibly customer focused, obsessively customer focused. He read the reviews of every one of the reviews posted on Chewy, and if there was something wrong, he followed it up. So the value support was very clear. All Petco products were probably 20-50% higher than Chewy’s, and you had to drive, park, etc. And I thought, well, I know that Chewy’s economic model works. and I know that Petco and PetSmart are owned by buyout companies that have influence over these companies, so the last thing we want to do is lower prices and collapse their margins. So I thought we had a seam where Chewy could win with better service, better prices, and with this obsessive, customer-focused CEO and founder, just a better overall experience. I didn’t necessarily think it was going to be as big as it was, but I’m very happy that it was.
Ryan has come to establish a awesome investment history on your own as an activist investor and now Chairman of GameStop, where you are also on the board of directors.
Yeah, after Chewy, Ryan took a little break. And then if you know Ryan, you know he’s a focused person. He then began to make very significant bets on the public markets with his wealth. And one of them was GameStop, which I think was his first truly activist position that he took and, as you know, became kind of a meme phenomenon, and I joined the board to help with the cause.
Do you make other deals with him? I saw that he was breaking alibaba stock recently.
When Ryan invests in the public market, he will always do so independently, and that’s a good thing. I need a cone of silence about that sort of thing, and I think he does, too. But if I get involved later, sometimes that gets discussed, not always, but sometimes.
Is it possible to intentionally create a stock of memes, and if so, how is it done?
Is it possible now? Maybe. But he was very involuntary at the time. At Chewy, we really stayed away from PR; Chewy was under the radar until [it was generating] billion in revenue. We didn’t tell anyone for all sorts of reasons, so Ryan’s tongue-in-cheek stance has always been to stay out of the limelight, so he’s pretty much the last person you’d expect him to be the figurehead of a media stock. so central. That was not by design; in a way it happened by itself.
You have more partners making software than Internet and consumer offerings, which is the team you lead. What interests your group? Why, for example, bet on a brand of oral care, Burstwhen there are so many oral care brands out there?
What was unique about Burst was that it basically co-opted the dental hygienist as its main channel, community, product development organization, and affiliates. So the Burst toothbrush and brushes and other products were co-designed with a community of over 10,000 hygienists, which is a good chunk of the market, as partners and ambassadors for the company. We really value the hygienist channel; It’s kind of a forgotten group within the dental community and it’s powerful. So they’ve really organized their resources to support Burst as a company.
He likes to invest first in companies that are mostly owned by their founders and financed by his own operations, although Burst had raised some seed money before he backed the company. How often is Volition the first investor on a team?
Probably half of our companies or north of half are fully booted at the time of our investment, which means they have raised $0. And then the other half have probably raised a little bit of start-up capital or from friends and family or funded it themselves. We typically write checks in the $10 million to $50 million range, with $20 million to $30 million being our sweet spot, for 20% to 35% of the company, although it may be a little south or south. north of it.
Which portfolio company has raised the most money from Volition?
Probably Creativewhich is a [10-year-old] no code, low code, software platform that is primarily focused on CRM. I think that would be our biggest initial check.
And how much of your business flow is inbound versus outbound?
Almost nothing is incoming. Almost all of our deals in our history have come from an analyst or an associate doing the initial disclosure and involving the rest of the company in the process.
It’s interesting to see that one of their focus areas is ad tech, which has been quite radioactive in recent years. What aspects of ad technology are you looking at?
We love contrarian industries, and ad tech is a great example of that. In fact, Chewy in the pet food e-commerce space was quite the opposite at the time. Radioactive is a fair descriptor. There have been many animals run over on the road. You’re playing in a sea of giants with Facebook and Google and others. But we’ve been very successful and if I were to mention two sub-segments in particular, I would point to the proliferation of online video, and along with that is the proliferation of social media and the implications of that for content and commerce businesses. What you tend to see wherever you can bring communities together is ad platforms spring up and start off inefficient, but they can become very efficient, which is actually good for the platform.
You have just announced a substantial new fund. How was that process? Were you climbing in the middle of the recession, or had you already lined up your commitments?
It is a very interesting moment. So we alerted our LPs in the spring of 2022 that we were going to go up in the fall of 2022. This starts in September. And you’ll remember that in the spring of 2022, the market was falling 4% per day. It was very choppy and we obviously wondered what the reception would be. And the reception at the time was, even though we didn’t ask for it, many, many of our LPs came back saying, ‘Hey, I want to increase my commitment by 50%’ or ‘double’ or ‘triple’ even. It was like an influx of incoming demand from our existing LPs. I’m like, Oh, that’s cool. That is really encouraging. We are very happy with that.
Then we come to September and launch the fundraiser. And obviously things had settled in that the market was worse and all the LPs felt more constrained and we could feel it. I don’t think anyone really knew, not even the people we were interacting with, if they could enter for the amount they originally wanted or were going to enter. And until we get to the day of the subscription agreement, which is the day that you have to sign on the dotted line with the amount, in general, almost everyone came back. But clearly it was a time for a tougher environment from the spring to the fall, and my understanding from talking to LPs now is that it’s basically gotten worse sequentially every quarter last year and this quarter from a fundraising perspective. So we are very proud to have made the fund and grateful for the support of our LPs.
Your frankness here is refreshing. Most VCs will still say the fundraising is great, while LPs privately complain that they feel tied down.
In the fall, when we were in the middle of fundraising, our fundraising advisor, who has been around for 25 years, said that this is the worst fundraising environment he has seen in his entire career. And he was there for the 2000 bust and obviously the 2008 one [downturn] and he’s seen all the cycles, but he called this one the worst, which kind of surprised me, but you know, I’ll trust his judgement.
