VC fund promises start-up founders a payday even if they fail

“The vision that we have is that when we’re raising a glass of champagne because we’ve just had an amazing outcome from a company, we want all of our founders and all of our investors to be raising my glass of champagne at the same time.”

As angel investors, an exit could also be triggered by a later-stage investor buying out the earliest investors to achieve a certain ownership percentage, without diluting the founders’ stakes.

Capital efficiency more important than ever

Flying Fox Ventures launched its inaugural fund twelve months ago, combining Ms Neumann and Ms Frazer’s previous ventures, Working Theory Angels and Eleanor Venture. Last year it deployed $12 million and has so far invested in 40 companies across 53 deals.

Flying Fox has opened its 2022-23 rolling fund for expressions of interest, with existing investors already committing over $2 million commitments to the fund.

The pair said they expect valuations to be lower in the coming year and that companies that have more capital requirements may struggle to get off the ground in the current fundraising environment.

“We can’t ignore the macro conditions. The world has changed a lot in the last weeks, and capital efficiency has become more important than ever,” Ms Frazer said.

“We’re lucky in that capital efficiency is in our DNA, we’ve always been attracted to companies that can operate in tighter markets, that will be a continuing theme for the coming year.”

Safety net

Ms Neumann said the profit-sharing deal would help create a financial safety net for their founders and diversify their investment portfolio, while they are busy building their own businesses.

“We believe that early-stage investments are an incredible asset class that can unlock significant wealth, and we want our founders to have access to that wealth as well. While they are maniacally focused on their company, we want to build some diversification in for them.”

Ms Frazer added, “Not every founder that we invest in will grow their company to a successful exit. But that doesn’t mean that they shouldn’t share in some of the upside of being part of this ecosystem.”

Globally, a small number of firms have adopted a similar model. For example, Kindred Capital, a London-based VC firm founded in 2015 sets aside 20 per cent of its carry to allocate to founders and advisors.

Chrys Chrysanthou, a partner at Kindred Capital, said it was still early days for the firm’s 2016 pre-seed/seed fund in terms of actual returns, but the model has already created benefits for the players in its ecosystem.

“Beyond the financial aspect though, which is not the one founders really care about, the setup have encouraged a sense of community and collaboration between the founders, where they become each other’s mentors, share pipeline of talent, share business development,” Mr Chrysanthou said.

“For the fund there are many benefits as well as these founders become a great source of future investment opportunities for us, help us win deals and due diligence opportunities, not out of obligation but out of the love and affiliation they have with Kindred. It’s a win-win across all parties.”

Other firms which have borrowed Kindred Capital model include Shilling in Portugal, ScaleX in Turkey, and Altitude which is being set up in Europe.