Venture capital firm PROOF said it has raised $135 million in its third fund, ending a prolonged period of fundraising marked by both historic highs in 2021 and a more conservative environment of late.
The Reston firm began raising its third fund in November 2021, a year after closing its second fund at a total of $120 million in December 2020. That second fund amounted to more than triple its first fund of $36.4 million.
But after a strong 2020, as inflation, supply chain logjams and, particularly, the rise of interest rates have hit in recent years, the cost of capital has only increased, making the fundraising process that much harder with time.
As PROOF co-founder and Managing Partner John Backus explains, the mantra for investors has changed. It’s no longer "grow at all costs," it’s now all about reaching profitability.
“We want to invest in companies that are real businesses, so they're not startups,” Backus said about the firm's plans for its third fund.
In that vein, he said PROOF is looking for companies that have doubled their annual revenue, that have attracted top-named investors for their rounds and that are either profitable today or have the potential to reach profitability after PROOF's round of financing.
PROOF has yet to officially close its third fund but has already made 12 investments with that $135 million, Backus said. He pegged the average revenue for those portfolio companies is $75 million, with the fund's first investment dating back to February 2022. Among those investments is Sabi, a Nigeria-based company that brings e-commerce tools to small businesses via mobile phones that Backus said is on track to make $75 million in revenue this year.
Its secret sauce, Backus said, is how it finds potential investments. Other investors in pre-seed stages that can't afford to put millions more in later rounds will often then bring those deals to PROOF, he said. So PROOF partners with those early-stage investors, offering them up to a 10% share of those later-stage deals, in an effort to tap into their expertise and yield the best returns for all parties.
For its own latest fund, Backus said its largest backer was Israel-based VC firm OurCrowd. Other investors included wealth management groups out of Richmond, Baltimore and Florida, along with angel investors he declined to name.
But he acknowledged the process of raising the third fund during more challenging economic times proved more difficult than initially anticipated. According to Securities and Exchange Commission filings, the firm hadn't planned to take more than a year for the effort — within its first month of fundraising, it had raised an initial $59 million off the bat in December 2021, then upped that to $81.7 million by February 2022. Its next and last filing thus far, from May of this year, indicates that total rose to $124.85 million, though the firm said it plans to submit an updated filing soon.
Still, Backus said, the fundamentals remained the same.
“You have to talk to a lot of people. Then what you're marketing or selling has to be good in the first place. Then it has to be what the person needs at that moment in time,” he said. “It just takes a lot of hard work and there's no magic. if there was magic, everyone would do it.”
PROOF — which stands for “Pro-rata opportunity fund” — was founded by Backus and Thanasis Delistathis — both were co-founders of Reston-based New Atlantic Ventures LLC — and John Burke, founder of True Ventures. In 2021, the venture firm was one of Greater Washington's largest based on its number of deals, numbering at 28 that year, according to Washington Business Journal research.
