Bain MD On New $1B Fund And Why Seed Rounds Are Sprouting           

Capital is finding its way into all sorts of funds and to all sorts of firms. Early-stage investments are mushrooming in size, and the competitive landscape is crowded, which makes prudent investing no easy task. Bain’s Matt Harris, managing director, weighs in on the mindset needed to separate promising young firms from thudding duds — and how Bain is allocating its latest billion dollar fund.

Bain Capital Ventures said Wednesday (November 14) that it has raised $1 billion in investment capital that will be geared toward targeting startup companies spanning seed rounds to growth-stage financing.

Of the $1 billion, there will be a $650 million core fund, a $250 million co-investment fund for larger growth investment activity, and $100 million from Bain’s partners, reports noted Wednesday.

The fund will be focused on AI, cloud technology, commerce and healthcare among other avenues. Bain Capital Ventures traces its genesis back to 2001, and has invested more than $3.6 billion across 240 companies. Exit values, according to reports, have exceeded $50 billion.

In an interview with Karen Webster of PYMNTS, Matt Harris, a Bain Capital Ventures managing director, delved into the mechanics of the investment activity that will come, the rationale behind those investments — and how the landscape for early-stage funding has changed.

But before delving into what’s different, it’s worth some detail on what remains the same. As Harris told Webster, “one of the things [Bain] holds sacred” is the ability to invest in the early stages of a company’s growth.

That’s not so easy in an environment where, Harris said “the ergonomics of our business are such that that the larger the fund gets the harder it gets to do the little stuff [in terms on investment size] … even though it has been our experience that it is the little stuff that can really make the difference.”

Giving a bit more granular detail to the numbers mentioned above, he said that of the $650 million core fund, roughly half would be allocated to early-stage investments, with the other half earmarked for growth-stage investments. That leaves room to back several million-dollar seed rounds, he said, and also fund several $5 million to $10 million series A rounds. Of the $250 million co-investment tranche of the fund, there is no structure demanding deal sizes, but the company can allocate $30 million to $50 million (or perhaps even more) to certain investments.

Taken as a whole, the $1 billion fund represents “kind of an intricate layer cake of ‘how do we grow so that we can have new opportunities or new partners?’ Growth is important to the organization without sacrificing what we think makes us special,” he told Webster.

Among promising areas (at least within payments), said Harris, lies the B2B space, where checks dominate commercial payments and there is a recognition of the need to digitize processes and payments. Not long ago, B2B payments remained an overlooked area of investment and innovation, but as Harris noted, now there is focus from the likes of Visa and Mastercard, where B2B Connect and Mastercard’s B2B trading platform were prominent on earnings calls. “That’s good,” he said of the increased efforts, “but I think it is going to bring some questions about these economic models to the fore” that will bring suppliers, buyers, associations and issuers together to discuss various roles and responsibilities as B2B moves to the digital realm.

Seed Rounds Sprouting

Bain Capital Ventures’ latest announcement comes against a backdrop where seed rounds are swelling, and as Webster noted, can be in the tens of millions of dollars.  Said Harris, tongue in cheek, these seed rounds are enough to give rise to “a whole watermelon.” In fact, seed rounds today are akin to what would typically be see in a Series B round.

So much capital deployed in such rapid fashion to so many young companies speaks to a mindset, said Harris where “some funds have a box they have to check … namely, ‘do you have a play in that space?’” Against the backdrop of that dynamic, he said, “these seed stage rounds can balloon.”

In an age where capital is sloshing around, deployed in fast-growing sectors with abandon, and turning any number of entrepreneurial dreams into companies backed by steroidal seed rounds, even funding a strong startup may not prove enough.

The part that he said is the most challenging is that even when an investment firm gets it right, investing in promising spaces and backing companies that get off the ground with some torque, “the fact that they are going to have a dozen competitors makes everybody less successful. There’s a clarity about market leadership that is good for everyone and in this environment it is hard to come by.”

One end result is that investment firms, said Harris, cognizant that there are less stellar returns in backing, say, the number-three player in a given vertical, crowd into what are perceived as market leaders, namely the ones attracting the most capital in the first place. “What this does is force more capital through the narrow aperture of the winner,” he told Webster, and then the valuations get lofty as “investors say ‘I do not care what I have to pay, I need to be in the winners.’”

But then again, gaining capital to deploy and deploying it wisely are two different things. In order to separate the duds from those startups that actually have a shot at success, and garnering investor returns, Harris said, it’s OK to fall flat sometimes in the pursuit of excellence. “If you approach it with the mindset of ‘how do we avoid the duds,’” he said, “you are also going to accidentally avoid the real winners.”