Little Engine Ventures (LEV) is a small hybrid fund focused on delivering value to customers, founders and investors.
Founded by serial entrepreneur, Daryl Starr, LEV intends to deliver superior results by championing the simple idea of working both smarter and harder than others in their weight class.
“I spend an absurd amount of time thinking about and working on projects that other people tend to think are a long shot,” Starr says, “However, I don’t consider myself a risk taker. I like to work really hard at finding giant upside and low downside and then relentlessly pursuing that vision.”
‘I think I can, I think can’ might be a cheesy slogan for an investment fund among leaders with names like BlackRock and Sequoia but Starr stands behind it.
Starr says, “We are little, but so are our partner companies. And our colleagues, although they might not admit it, often pass by great opportunities with much snobbery, sighting their inability to lead seed rounds or needing to deploy too great an amount of capital per deal.”
This trend does hold some merit. According to numerous publications, micro venture capital firms continue to spring up in droves. Foremost among their motivation seems to be the lack of attention larger firms can place in seed investment rounds.
What is a seed investment round? In venture capital, the seed round is the first institutional equity investment in a company. Only a few companies ever seek equity investors outside of friends and family and even fewer obtain this type of professional investment.
What really separates LEV is the hybrid structure. Nearly all MicroVC firms use serial closings on multiple funds to raise limited partner investor capital. LEV instead chose to take a different approach.
“We are interested in creating as well as owning great businesses,” Starr said, “A microVC hopes to graduate to a real VC. However, we have no desire to plow limited partner resources into growth capital.”
So, what is the plan? Starr went on to explain how a successful microVC can often become cornered into technology businesses that need billion dollar exits to make investor returns. Instead, LEV appears to have taken a more traditional “go long” ownership appetite to low tech businesses as well.
“I love technology when it has a visionary leader wielding it, however, the rest of the time I favor perpetual cash machines,” Starr quipped. What do these look like? That part is not always clear, he commented.
For the most part, these traditional businesses, dominate a small market. They are the big fish in a little pond. As a result they regularly take home solid margins and have serious staying power. With companies that fit in this profile, LEV will take controlling interest, a complete problem for most VC firms and makes them more like Private Equity (PE.)
Starr explained how important liquidity becomes to the investor. When VC firms invest in startups they expect them to get big very fast and then have a liquidity event, or an “exit” at some point. Starr said LEV has at least five paths for each of their startups. They are certainly welcome to get big and cash out. For the rest of LEV’s investments however, it seems the plan is to buy and hold.
“There are a lot of buyers for businesses with a value of less than $50M,” Starr stated. “Industry eagerly pays a premium for proven product-market fit. This is the primary aim of our startups in the greater ecosystem. We basically become the external R&D for larger companies.”
What about the other investments? Starr went on to explain how owning businesses that are generating profits allow them to reinvest those earnings elsewhere.
“I’ve started and bought little businesses for as long as I can remember. It’s not really that complicated. The hardest part is often putting in all the time so you are practiced and ready when the opportunity presents itself. Most people only go through this a once in their life. I’ve found myself doing it (buying and selling companies) more and more often.”
The funny thing about being young is you often don’t realize what shouldn’t be possible. The Motley Fool keeps reinventing the American economy, repeating the phrase, ‘I think I can, I think I can.’
Sometimes, you have to wonder if the Little Engine ever grew up.