Last month, Capital Willa 13-year-old, 30-person Boston-based private equity firm, announced it had closed its fifth fund with $675 million in capital commitments, bringing its total assets under management to $1.7 billion of dollars.
While most VCs will tell you they had no problem raising their new fund, Volition co-founder Larry Cheng – a former Bessemer Venture Partners, Battery Partners and Fidelity Ventures – says it wasn’t. not his experience when he tried to lift the company’s latest vehicle. In the fourth quarter of last year, he said of Volition’s limited partners, “I don’t think anyone really knew – even the people we were interacting with – if they could come in for whatever amount they wanted. originally, or if they were going to enter at all.
That they showed up with their checkbooks is not shocking. Among Volition’s other exits, the company invested early in pet market Chewy, which was later sold to PetSmart for a whopping $3.35 billion in 2017 before being sold to others. buyers in 2020. In fact, Cheng – who remains focused on the internet and consumer offerings while other of his partners focus more on enterprise software – has remained so close to the Chewy founder and meme-stock king Ryan Cohen that he is a board member of GameStop, which Cohen chairs.
A few days ago, we talked a bit with Cheng about this friendship. We also talked 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 now, but Ryan Cohen said Volition backed him at a time when no other venture capital firm would return his calls. Why did you invest in him?
LC: Ryan was incredibly customer-centric — like, obsessively customer-centric. He read the reviews of every reviewer posted on Chewy, and if there was anything wrong, he would follow it. Then the prop value was super clear. Every Petco product was probably 20-50% better than Chewy’s, and you had to drive and park and so on. And I thought, well, I know Chewy’s business model works. and I know that Petco and PetSmart are owned by buyout companies that leverage those companies, so the last thing we would want to do is lower prices and crash their margins. So I figured we had a seam where Chewy could win with better service, better prices, and — with this obsessive, customer-centric 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 glad it was.
Ryan went on to establish a impressive his own investment background as an activist investor and now chairman of GameStop, where you’re also a board member.
Yeah, after Chewy, Ryan took a little break. And then if you know Ryan, you know he’s a pretty focused person. He therefore began to take very large bets on the public markets with his fortune. And one of them was GameStop, which I think was his first real activist position that he took, and as you know, it became kind of a meme stock phenomenon, and I joined the board to help the cause in some way.
Do you do other business with him? I saw that he cracked Alibaba shares recently.
When Ryan invests in the public markets, he always does so independently and that’s fine. I need a cone of silence on this stuff, and I think he does too. But if I get involved afterwards, it is sometimes discussed — not always, but sometimes.
Is it possible to intentionally create a stockpile of memes and if so, how do you do that?
Is it possible now? Maybe. But it was very unintentional at the time. At Chewy, we’ve really stayed away from public relations; Chewy was under the radar until [it was generating] a billion in revenue. We haven’t told anyone for all sorts of reasons so Ryan’s ironic posturing has always been to stay out of the spotlight so he’s pretty much the last person you’d expect to be the face of bow of such a central stock of means. It wasn’t intentional; it just happened.
You have more partners making software than internet and consumer offerings, that’s the team you lead. What interests your group? Why, for example, bet on a brand of oral care, Burstwhen there are many brands of oral care?
What was unique about Burst was that they essentially co-opted the dental hygienist as their primary channel, community, product development organization, and affiliates. Thus, the Burst brush and brushes and other products were designed in collaboration with a community of more than 10,000 hygienists – which represents a good part of the market – as partners and ambassadors of the company. We really appreciate the hygienists channel; it’s kind of a forgotten group within the dental community and it’s a powerful group. So they really mobilized their resources to support Burst as a company.
You like to invest first in companies that are primarily owned by their founders and funded through their own operations, although Burst raised seed money before backing the business. How often is Volition the first investor in an outfit?
Probably half of our companies or north of half are fully seeded at the time of our investment, meaning they have raised $0. And then the other half probably raised some seed money or friends and family or funded it themselves. We typically write checks in the range of $10-50 million, with $20-30 million being our sweet spot, for 20-35% of the business, although that may be a bit south or north of that.
Which holding company raised the most money from Volition?
Probably Creativewhich is a [10-year-old] no code, low code, software platform primarily focused on CRM. I think that would be our biggest initial check.,
And how much of your deal flow is inbound versus outbound?
Almost nothing is incoming. Almost all of our deals in our history originate from an analyst or associate who does the initial outreach and engages the rest of the company in the process.
Interestingly, one of your areas of focus is ad tech, which has been pretty radioactive for the past few years. What aspects of ad technology do you review?
We really like contrarian industries, and ad tech is a great example. In fact, Chewy in the pet food e-commerce space was quite upsetting at the time. Radioactive is a fair descriptor. There were a lot of road deaths along the way. You are playing in a sea of giants with Facebook and Google and others. But we’ve had great success and if I had to name two sub-segments in particular I’d highlight the proliferation of online video, and alongside that there’s the proliferation around social media and the implications of that for content and business ventures. What you tend to see wherever you can gather communities is that ad platforms emerge and they start off being inefficient, but they can become very effective, which is actually good for the platform. -form.
You have just announced a substantial new fund. What was this process like? Did you increase in the middle of the recession, or had you already aligned your commitments?
It is a very interesting period. So we alerted our LPs in the spring of 2022 that we were going to raise in the fall of 2022. It starts in September. And you may recall that in the spring of 2022 the market was down 4% per day. It was very hectic, and obviously, we wondered what the reception would be. And the reception at that time was – even though we didn’t ask for it – many, many of our LPs were coming back saying, “Hey, I want to increase my engagement 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 great. It’s really encouraging. We are so happy about it.
Then we came in September and started fundraising. And obviously things had settled down in the direction where the market was worse and all the LPs were feeling more constrained and we could feel that. I don’t think anyone really knew – even the people we were interacting with – if they could get in for whatever amount they wanted initially or if they were going to get in at all. And until we get to the day of the subscription contract, which is the day you have to sign on the dotted line with the amount, overall, almost everyone is back. But it was clearly the time for a tougher spring to fall environment, and from what I understand from talking to LPs now, it’s gotten worse sequentially every quarter of the last year. and during this quarter from a fundraising perspective. We are therefore very proud to have created the fund and grateful for the support of our LPs.
Your candor here is refreshing. Most VCs will always say the fundraising is great, while LPs complain privately that they feel short.
In the fall, when we were in the middle of fundraising, our fundraising consultant, who has been there for 25 years, said it was the worst fundraising environment he had seen in his entire life. career. And he was there for the 2000 bust and obviously the 2008 bust [downturn] and he saw all the cycles, but he called it the worst, which surprised me a little, but you know, I’m going to trust his judgment.