The Tech Square Ventures Model

Urvaksh broke the news on Friday about a new $10 million seed fund called Tech Square Ventures run by Blake Patton. Atlanta has a dearth of seed stage, high risk capital, so this is great for the city. Blake is an experienced operator who is well-regarded in the startup community, having run several venture-backed companies, making him an ideal person to lead a new fund.

From an entrepreneur perspective, I think it’s important to understand how a $10 million seed fund typically works:

  • Capital is committed but not sitting in the bank (it has to be called from the investors, often at a rate of 20% per year for five years)
  • 99% of the capital is from investors and 1% is from the partners
  • 2.5% of the total fund amount is made available for the first five years for operating costs (e.g. $250,000/year to pay for salaries, office space, legal, accounting, travel, etc.) with a reduced amount for the next five years and nothing beyond 10 years
  • Partners receive 20% of the profits (carry) after the fund and all money used for annual operating costs have been returned
  • 1/3 of the money for initial investments and 2/3 of the money for follow-on investments (e.g. when a $1 is invested, $2 needs to be saved to invest in some of the companies at a later date as they grow)
  • Example investment approach:
    15 initial investments of $250,000 each = $3,750,000
    5 of the 15 investments show promise and an additional $6,250,000 is invested in those five
  • Target investor return is three times cash on cash in seven years, meaning take the $10 million invested and turn it into $30 million

So, my guess is Tech Square Ventures will make somewhere in the neighborhood of 15 investments over an initial 3-4 year period, with most investments providing little to no return and 2-3 investments providing almost all the returns.

I’m excited for Blake and want to see Tech Square Ventures become a successful establishment in Atlanta.

What else? What are your thoughts on the $10 million seed fund model?

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