Underscore VC Quickly Raises $117M for Second Early-Stage Fund

Underscore VC’s partners planned to begin seeking capital for the firm’s second early-stage venture fund in the fall. Instead, their backers approached them, eager to re-invest.

“We were pre-empted,” says co-founder and partner Michael Skok. “That’s pretty unusual.”

The result of those talks is being announced Thursday: Underscore’s investors are pouring $116.9 million into the firm’s second fund, says Cory Bolotsky, head of platform and community for the Boston-based venture firm.

“In this business, you can spend a lot of time fundraising,” says Skok (pictured above, second from left). “This was a huge bonus.”

Underscore raised $85 million for its debut fund in 2016. It says it has invested in more than 20 young ventures working in e-commerce, marketing technology, open-source software, cloud infrastructure products, blockchain systems, artificial intelligence, connected devices, and augmented and virtual reality. Its portfolio companies include Salsify, CloudZero, Zaius, Soofa, and Commonwealth Crypto.

Although none of Underscore’s portfolio companies have been acquired, the venture firm has generated its first financial return, after Underscore invested in a blockchain startup’s digital token offering, Skok says. Underscore still holds an equity stake in the company, which Skok declined to name.

Skok declined to say exactly how much is left of the first fund’s pot, but he says it’s at least $10 million for investing in new companies, plus “significant reserves” for follow-on investments in companies already in the firm’s portfolio.

Fundraising by U.S. venture capital firms was relatively slow in the first quarter of this year, and both the amount of capital raised and the total new fund count could decrease slightly in 2018 versus 2017, according to the most recent Venture Monitor report produced by PitchBook and the National Venture Capital Association. Nevertheless, there was notable fundraising activity at both the early and later stages. “Micro-funds”—defined in the Venture Monitor report as vehicles smaller than $50 million—made up more than half of the new funds closed in the first quarter. That was the first time that has happened since 2014, according to Venture Monitor data.

Meanwhile, General Catalyst Partners, Norwest Venture Partners, and Battery Ventures each closed on more than $1 billion in new funds in the first quarter.

Skok is concerned by the flurry of VC firms raising larger “mega funds.”

“The reality is you are forced to write bigger checks, which means you’re forced to later-stage” deals, Skok says. “It creates a gap at the early stage. We’ve seen this cycle over and over again” in recent decades.

Still, he’s encouraged by the early-stage venture firms emerging, such as Material Impact in Boston. (Xconomy tracked 15 other new early-stage tech funds that popped up between 2015 and 2017, including Underscore, Pillar Companies, G20 Ventures, and MIT’s The Engine.)

Even though Underscore raised more money for its second fund, it’s still “intentionally small” and could have been much bigger, Skok says.

“One of the reasons why we were OK with taking more capital is we want to be able to help our entrepreneurs through the seed to series A [stage] gap,” Skok says. “Most of these [early-stage] funds can’t write the series A check. Our model does allow us to write that check.”

One of the interesting things about Underscore is the network of tech executives and experts in various sectors it has assembled to provide expertise and support to the firm’s portfolio companies. Plenty of venture firms do this, but Underscore is trying to structure it in a more systematic way than usual. The individuals in its network, called the “Core Community,” can choose to invest in Underscore’s portfolio companies alongside the main fund, and they can also receive shares, out of Underscore’s pocket, as a reward for spending time working with the startups. In general, about a dozen Core members are investing their time and/or money in each startup, Skok says.

He says the response to its model has exceeded expectations, with several hundred people joining its Core Community.

“We’re shocked at how engaged people are,” Skok says. “I think that’s why our [investors] jumped in the way they did” with the second fund, he says.

Jeff Engel is a senior editor at Xconomy. Email: jengel@xconomy.com Follow @JeffEngelXcon

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