Volition’s Larry Cheng on trying to raise a fund right now: “All of the LPs felt more constrained”

Last month, Volition Capital, a 13-year-old, 30-person Boston-based growth equity firm, announced it has closed its fifth fund with $675 million in capital commitments, bringing its total assets under management to $1.7 billion.

While most VCs will tell you they had no problem raising their newest fund, Volition cofounder Larry Cheng — an alum of Bessemer Venture Partners, Battery Partners and Fidelity Ventures — says that wasn’t his experience when trying to raise the firm’s latest vehicle. In the fourth quarter of last year, he says of Volition’s limited partners, “I don’t think anyone really knew — even the folks that we were interacting with —  whether they could come in for the amount they originally had wanted, or whether they were going to come in at all.”

That they did show up with their checkbooks isn’t shocking. Among Volition’s other exits, the firm famously invested early in the pet marketplace Chewy, which later sold to PetSmart for a whopping $3.35 billion in 2017 before being sold to other buyers in 2020. In fact, Cheng — who remains focused on internet and consumer deals while others of his partners are more focused on enterprise software —  has remained so close with Chewy founder and meme-stock king Ryan Cohen that he’s on the board of GameStop, which Cohen chairs.

A few days ago, we talked with Cheng a bit about that friendship. We also talked about some of Cheng’s more current, contrarian bets like ad tech. Our chat has been edited for length and clarity.

TC: It was ages ago now, but Ryan Cohen has said Volition backed him at a time when no other VC firm would return his calls. Why did you invest in him?

LC: Ryan was incredibly customer centric — like, obsessively customer centric. He read the reviews of every single review posted on Chewy, and if there was anything that was wrong, he would follow up with it. Then the value prop was super clear. Every product at Petco was probably 20% to 50% higher than Chewy, and you had to go drive and park and so forth. And I thought, well, I know Chewy’s economic model works. and I know Petco and PetSmart are owned by buyout firms that have leverage on these businesses, so the last thing we’d want to do is lower prices and collapse their margins. So I thought we had a seam where Chewy could win with better service, better pricing, and — with this obsessive, customer-centric CEO and founder — just a better overall experience. I didn’t necessarily think it was going to be as big as it was, but I’m very happy it was.

Ryan has gone on to establish an impressive investing track record on his own as an activist investor and now chairman of GameStop, where you’re also on the board.

Yeah, after Chewy, Ryan took a little bit of a break. And then if you know Ryan, you know he’s kind of a concentrated person. So he started to take very significant bets in the public markets with his wealth. And one of those was GameStop, which I think was his first true activist position that he took, and as you know, that became sort of a meme stock phenomenon, and I joined the board to sort of help with the cause.

Do you do other deals with him? I saw that he was snapping up shares of Alibaba recently.

When Ryan makes public market investments, he will always make that independently and that’s good. I need a cone of silence on those types of things, and I think so does he. But whether I get involved thereafter, sometimes that is discussed — not always, but sometimes.

Is it possible to intentionally create a meme stock and if so, how do you do that?

Is it possible now? Maybe. But it was very unintentional at the time. At Chewy, we really stayed away from PR; Chewy was under the radar up until [it was generating] a billion in revenue. We didn’t say anything to anyone for all sorts of reasons, so Ryan’s ironic posture has always been to stay out of the limelight, so he’s almost the last person you’d expect to be the figurehead of such a central means stock. That was not by design; it sort of happened on its own.

You have more partners doing software than internet and consumer deals, which is the team you lead. What interests your group? Why, for example, bet on an oral care brand, Burst, when there are many oral care brands out there?

What was unique about Burst was they basically co-opted the dental hygienist as their primary channel, community, product development organization and affiliates. So the Burst brush and brushes and other products have been designed in conjunction with a community of more than 10,000 hygienists — which is a good chunk of the market — as partners and ambassadors of the company. We really value the hygienist channel; it’s kind of a forgotten group within the dental community and it’s a powerful one. So they’ve really marshaled their resources to support Burst as a company.

You like to invest first in businesses that are mostly owned by their founders and financed by their own operations, though Burst had raised some seed funding before you backed the company. How often is Volition the first investor in an outfit?

Probably half of our businesses or north of half are fully bootstrapped at the time of our investment, meaning they’ve raised $0. And then the other half have probably raised a little bit of seed or friends-and-family money or have funded it themselves. We’re typically writing checks in the range of $10 million to $50 million, with $20 million to $30 million being our sweet spot, for 20% to 35% of the company, though it can be a little south or north of that.

What portfolio company has raised the most money from Volition?

Probably Creatio, which is a [10-year-old] no code, low code, software platform that’s primarily focused on CRM. I think that would be our largest initial check.,

And how much of your deal flow is inbound versus outbound?

Almost none of it is inbound. Almost all of our deals in our history have been sourced from an analyst or an associate who does the initial outreach and engages the rest of the firm in the process.

It’s interesting to see that one of your areas of focus is ad tech, which has been pretty radioactive in recent years. What aspects of ad tech are you looking at?

We really love contrarian sectors, and ad tech is a great example of that. In fact, Chewy in the pet food e-commerce space was pretty contrarian at the time. Radioactive is a fair descriptor. There’s been a lot of roadkill along the way. You’re playing in a sea of giants with Facebook and Google and others. But we’ve had some great success and if i had to call out two subsegments in particular, i’d point to the proliferation of online video, and adjacent to that is the proliferation around social media and the implications of that for both content and commerce businesses. What you tend to see wherever you can draw communities together is that advertising platforms emerge and they start out inefficient, but they can become very efficient, which is actually good for the platform.

You just announced a substantial new fund. What was that process like? Were you raising in the midst of the downturn, or had you already lined up your commitments?

It’s a very interesting time. So we alerted our LPs in the spring of 2022 that we were going to be raising in the fall of 2022. This is starting in September. And you may recall that in the spring of 2022, the market was going down by 4% a day. It was very choppy, and obviously, we wondered what the reception would be. And the reception at that time was — even though we didn’t ask for it — many, many of our LPs coming back saying, ‘Hey, I want to increase my commitment by 50%’ or ‘double’ or ‘triple’ even. It was just like an inflow of inbound demand from our existing LPs. I’m like, Oh, that’s great. That’s really encouraging. We’re so pleased with that.

Then we got to September and we actually launched the fundraise. And obviously things had settled in that the market was worse and all of the LPs felt more constrained and we could feel it. I don’t think anyone really knew — even the folks that we were interacting with — whether they could come in for the amount they originally had wanted or whether they were going to come in at all. And until we got to the subscription agreement day, which is the day you have to sign on the dotted line with the amount, by and large, nearly everyone came back in. But it was clearly a time for a tougher environment from the spring to the fall, and my understanding in talking to LPs now is that it’s basically gotten sequentially worse every quarter last year and into this quarter from a fundraising perspective. So we’re really proud to get the fund done and thankful for the support of our LPs.

Your candor here is refreshing. Most VCs will still say that fundraising is great, while LPs privately grouse that they feel strapped.

In the fall, when we’re in the midst of fundraising, our fundraising counsel, who has been around for 25 years, said that this is the worst fundraising environment he’s seen in his entire career. And he was there for the 2000 bust and obviously the 2008 [downturn] and he has seen every cycle, but he called this the worst, which was a little surprising to me, but you know, I’ll trust his judgment.