We agree with that as ONSET funds seed capital to many start-up companies so there must be a certain limit to the investment cost. The larger the venture capital invested the greater the effort needed by ONSET with that company to strive in a way that will compensate ONSET for its extra seed capital.
- Spotlight deals were out of scope for ONSET. These segments were chased by many competitors who were ready to take irrational decisions and contribute extra funds above the value of these deals.
However, we think this is not the case as the tougher the market for a certain business, the more potential and profitable it must be. Business in any market, it is all about competition, if one ran away from a certain niche just because it is highlighted then in a few years, he will find himself totally out of business.
Glancing at ONSET's financial cycle, one would fnd that ONSET went through three rounds of fund raising; the first was a $5 million feeder fund followed by three later stage venture capital funds: a $30 million fund to establish ONSET 1 in 1989, and then a $67 million fund was raised in 1994 for ONSET 2. Two thrids of the capital raised had been already invested in seed financing and follow on investments. The remaining $22 million was to be used in funding later rounds of investments for companies already in ONSET's portfolio. However the question now is how much extra money the investors should seek to raise in their fourth round for ONSET 3. As of mid 1997, ONSET 2 had four partners and had invested in 47 companies. In 1997, the venture capital industry was experiencing high returns on VC investments and the economincs of the business was a significant incentive to create larger funds. As a consequence the average of the VC fund increased by 40% to $71 million. Thus, there was more liquidity in the market, and IPO market was quite active at that time which also boosed the VC investment.
ONSET 3 had 4 partners, and they usually took one seed stage deal per partner per year. Since the average seed stage investment per deal has also increased over the years – it was estimated to be $4.5-$5 million per deal in ONSET 3, the investors would have to raise 4 deals x $5 = $20 million per year. It also takes 4 years from initial investment to liquidity, and therefore based on a 4 year cycle, the investors would have to raise $20 million x 4 = $80 million. Assuming a $15 million in expenses and fees, then the total would be $95 million.
When the investors went around to fund this money, they came back with even a higher figure from interested investors – a $140 million fund. They have the choice of taking the money, since they are in a very good economical period, and they wouldn't be sure to raise the same amount of money after 4 years. However, to take the money, they should have a plan of what to do with the extra $45 million. If ONSET decides to take the extra money for the fund, then it would have to modify some of the aspects concerning its business model.
If it decides to only focus on seed stage investments, then it would have to seek more deals per year, but this would ultimately mean higher risk, which again contradicts with ONSET's strategy. Another option would be either to consider other stages of financing; like the liquidity stage – which means that if ONSET were to invest in a company, it would allocate its seed stage fund and then put in another round of investment in the round closest to the liquidity stage. By doing this, it would make higher returns on investment and spread the business risk on two stages. It would also attract top tier players and make their per deal investments worthwhile.
Another alternative would be to consider their left out strategy and partner with another large venture capital firm, and invest in higher capital invesments. However, rules have to be set out so that only top level deals are selected by both parties and that ONSET is not skewed by this strategy. In all cases, ONSET should utilize the economic growth and the good times it is in to collect the $140 million fund and expand its business model, while calculating the risk of each alternative. By doing so, it would sustain to attract top tier players in the industry and at the mean time continue to make profits.
TallyUp, one of the companies that had been seeded by Onset II, was still waiting for more funding by Onset III. Reflecting back on the way TallyUp was introduced to Onset Ventures, we realize that it was a somewhat atypical way for Onset. Unlike Onset’s model for accepting projects with good ideas, TallyUp’s initial idea was not that appealing and “lacked sufficient market” according to Darlene Mann’s opinion. However, in spite of that, she and other Onset managers decided to accept TallyUp because the co-founder, Andy Swett, showed potential and had an entrepreneurial spirit. After a few sessions of brain storming, they decided to shift to the sales force compensation system which was quite intriguing.
Onset and TallyUp were followed by a number of successful decisions. Their decision to use the expertise of a part-time compensation consultant was a good one. Also, their extensive market research helped them assess and evaluate the needs of their customers in order to be able to create an off-the-shelf product. Moreover, the Socratic methodology efficiently used by Onset helps outline and define the value chain of TallyUp's product. Dividing the team into two teams, one concentrating on improvement of the technical side and product design while the other doing the market research was an excellent step to minimize efforts and save time. Also, this led to augmentation of the product design with information obtained by the market team. By attracting two paying development partners, TallyUp and Onset outperformed their efforts in a step enabling them to try their product and fine tune it.
However, their decision to hire a CEO was a little early since their business model had not yet settled. Moreover, their product was not yet introduced in the market and not yet fully developed.
Finally, Onset should consider financing part of the beta stage before releasing the product in the market. It should also accept part of the funding from VC firms since the VC market was hot. So, Onset should take advantage of this current situation.