A few weeks ago, Uncork Capital announced that it had closed on $400 million in capital commitments for two new funds: $200 million for a seed-stage vehicle and $200 million for an opportunity-style fund that mostly supports startups in its portfolio.
The funds are twice what Uncork raised in 2019 when it announced two new funds, and managing partner Andy McLoughlin told us late last week that the firm will likely invest 70% of that money in B2B software startups. The 19-year-old company has stakes in enterprise companies like 401(k) service provider Human Interest and developer software business LaunchDarkly, and it’s more interested in dev tools, infrastructure opportunities, vertical industry software, and traditional enterprise software than consumer brands like Fitbit, Postmates, and Poshmark.
“We think there are a lot of really interesting opportunities in consumer and marketplaces and fintech, but [B2B software] is certainly the bread and butter of what we’re doing today,” McLoughlin said.
We were also curious about Uncork’s changing composition and McLoughlin’s view of the market, where the tech world’s gloomy headlines don’t match up with the many startups that continue to announce funding. McLoughlin discussed how the market is changing in real time at Uncork’s current San Francisco office, which will move later this year. That’s next.
TC: Your funds are great. You announced them on Medium. Meanwhile, [Uncork founder Jeff Clavier’s] peers are moving on. I’m wondering if this is a succession plan.
AM: This was the goal. Jeff wanted to build something bigger than him and that would outlast him, and that’s the start of what we’re doing now. Today, Jeff is still a GP. He’s staying. His big French opinions remain.
Most opportunity funds are for portfolio companies. Will you shop elsewhere?
We’ve set aside 20% of the fund to look at net new names for the first time. It’s possible that 100% goes into the existing portfolio. Looking at the companies and opportunities, we could invest $200 million twice or three times into the portfolio. But if it’s potentially a deal that I had done as an angel before I joined the team or a deal that Tripp or Susan led at the Series A (before joining Uncork) and it’s going to raise a Series D, we wanted to give ourselves the ability to take a look at those without having to bend the rules and go to [our limited partners] for approval.
Is there less competition for later-stage deals than early stage? Where are investors writing term sheets?
It’s busy at seed. As fundraising becomes harder, I think seed will contract and many seed firms will fail. But there’s still a lot of cash. To be clear, we don’t write small, participatory pre-seed bets or get involved at Series A or Series B with our first check. Seed rounds are led by us.
Series A is like the rich and poor. You’ll get money if you’re building a hot generative AI company. If it’s suddenly out of style, it’s harder.
Uncork has been quiet except for some deals announced earlier this year. Have you become more cautious in this market or invested more quietly?
I think everyone was in price discovery mode from March to September last year. It was quiet then. We didn’t write any seed checks during that time, and it was the longest we’ve gone without investing. Since September, we’ve been active. When we invest in a seed company, the announcement may take months.
You’ve said you’ll fund startups, even those without code. How do you trust someone like that, especially a new founder?
I look at market, people, and technology risk when investing in very early-stage companies. When we’re looking at a team that’s just starting, I’m okay with taking technology risk. You’re taking a risk on their ability to execute and build technology products if you think they’re great and have a unique perspective and the market is big and interesting.
What’s an example?
Last year, Tripp did a deal with two founders from Postmates, an investment Jeff had led that ultimately exited to Uber and did well. I think the CEO was Postmates’ 15th employee, and she ran its civics program and worked on ways to keep food from going to waste.
I think she saw that the U.S. returns culture, especially for durable goods, is insane. The U.S. returns 50% of goods, and 80% of those goods end up in landfills. Her insight was that there’s a network of charities that would make great use of these things [while helping stores turn them into] charitable donations, which could then act as a tax on offset. It’s early, but they understand the market and have built this technology before, so this seems like a risk we can take. The business’s biggest challenge is scaling, but there are many logistics startups they can work with.
After so much froth, what other big changes are you seeing?
After blowing through capital on a one-year or 18-month cycle a few times, I think a lot of the smaller seed funds that have grown in the last five or six years will find their LPs are tapped out. Many high-net-worth individual LPs will say, “Look, you can’t keep coming back to the well.” We must see distribution to paid-in capital before recommitting.”
Many operator VCs will be pressured by their companies and boards to focus on their businesses.
I believe Series A firms will continue to decline. Seed programs are now in every Series A fund. But we know we can beat them if we move quickly, so that’s where the opportunities are. Big funds need time, even with a $2 million check. Smart entrepreneurs also realize that bringing in a top-tier firm that doesn’t lead their Series A still carries signal risk.
I think 2024 will be a bloodbath because so many startups at all stages have dug in and are stretching their cash. To avoid a down round, companies that should have raised this year will try to raise in 2024 or 2025, but there won’t be enough money.