The Founders Fund raised a $220 million first institutional fund, beating the $120 million initial target it set more than eight months ago.
The managing partners declined to comment on what specific institutions they tapped for the new fund, citing confidentially agreements. But the money came from foundations and endowments, Managing Partner Ken Howery says.
The new fund is larger than the $50 million fund the group raised from individuals in January 2005.
The fund is focused on early stage Internet startups in Silicon Valley, but will consider other technologies in other locations.
The Managing Partners made disparaging comments about the venture capital industry in a conference call with journalists. Managing Partner Sean Parker accused other firms of “bad behavior” that cost company founders. “I can’t point to anything specifically,” he says. “Most of this stuff doesn’t happen out in the open, it happens behind closes doors. What you hear is mostly rumor and it creates a healthy suspicion by the entrepreneurs.”
Managing Partner Peter Thiel pointed to complicated deal structures as a way that VCs harm entrepreneurs. “People are trying to extract as much as they can from a pie rather than make a larger pie,” he says. “You want to have some preference rights, but you don’t want all kinds of weird legal bells and whistles that misalign incentives. When things go wrong, all kinds of things unravel because of this.”
The firm tries to ensure its incentives are aligned with the incentives of the founders it backs. Toward that end, it does not set a requirement of how much equity it needs to hold in a company to make an investment. It has also created a classification of stock that helps founders retain some degree of liquidity through the financing process.
The firm looks for founders who make good teams, preferably people who have worked together for some time. “Are these people who just met each other at the slot machine and Vegas and want to get married?” Thiel says he asks of teams looking for financing. “Sometimes you can hit the jackpot, but it’s risky.”
The firm cited poor industry-wide returns as one of the reasons it developed what it believes to be a particularly pro-entrepreneur approach. “The venture capital industry is at a major transition point and we remain extremely bullish about technology,” Thiel says. “Venture capital hasn’t made money for 10 years and that this run is almost at an end.”
Thiel cites aggregate industry returns data to support his claim of poor fund performance. “If you look at VC funds since 1998, they are in aggregate, maybe most of them aren’t underwater, but you would have done better putting your money in treasury bills,” he says. “A lot of the more sophisticated limited partners we talked to clearly shared the view that there is something broke. The drought’s been going on for a while and people are questioning if there shouldn’t be some kind of structural change.”
The Founders Fund has invested in startups such as Facebook, Slide, IronPort and PowerSet. It has also backed “a handful” of Facebook application companies.