Venture capital is an inherently risky business. Most venture-backed startups fail, so fund managers often count on just one big hit to juice an otherwise mediocre investment portfolio.
Six-year-old venture capital firm Juxtapose is betting that it can create a better track record. And in a sense, its startups can’t afford to fail. The venture studio, which creates its own startups, spawns just one to two businesses a year, a far lower number than that of rival investors. In fact, it has invested in just eight companies in its first mix of funds, which totaled $150 million overall.
While the venture capital model has clearly worked for investors in businesses such as Facebook and Snapchat parent Snap, “the venture model wasn’t built for all companies,” says Patrick Chun, Juxtapose cofounder and managing partner. “We are maybe the opposite of a venture capital fund.”
He continues: “So in some ways, we have a risk profile that is more like a private equity fund. If one or two businesses fail, we have a pretty big hole to crawl out of.”
His comments come as Juxtapose closes on $300 million for its second fund, the firm announced Friday. It plans to create about 12 businesses through the fund, which translates into more dollars per company compared with how much it gave to the startups in its first fund.
In short, the fund seeks to achieve venture capital returns with private equity risk, says Chun. In part, that means that Juxtapose creates companies that have big potential addressable markets and fulfill an apparent need. Juxtapose also seeks tech companies that address existing needs and could eventually replace legacy Fortune 500 companies with a similar focus. Industries such as health care and financial services, which have yet to be significantly impacted by technology, are a particular interest.
At the same time, the firm also aims to minimize risk through intense due diligence before making its investments, spending an average of two to three years researching an industry, he says. And after homing in on an idea, Juxtapose then seeks a well-known and experienced CEO—the average age of CEOs among Juxtapose portfolio companies is 50—to refine the company and lead the startup.
Chun, a former partner at Thrive Capital, and Jed Cairo, a former principal at private equity firm BeaconLight Capital, founded Juxtapose in 2015. Unlike many other venture incubators and accelerators, the firm comes up with the ideas for all of its portfolio businesses. It’s more common for venture studios to fund ideas originated by an outside founder in addition to those developed from within.
In creating its first startup, Care/of, which sells personalized multivitamin packs, Juxtapose was inspired by the rise of personalization in commerce, a trend that included the creation of online clothing retailer Stitch Fix. Juxtapose also wanted to tap into a rising consciousness around health and wellness as a lifestyle. So the team focused on health supplements and recruited Craig Elbert, a founding member of Bonobos, to build a company based on the idea.
In creating dentistry startup Tend, Juxtapose saw a large industry with obvious pain points: Consumers hated getting checkups, leading Juxtapose to create a company with upfront pricing and a fancier experience.
The question with Juxtapose’s model, however, remains whether it can make larger-scale exits from its investments—i.e., make big returns.
Care/of is the firm’s only exit so far; it was sold last year for about $225 million to Bayer. But Chun says the fund does have portfolio companies in deal talks that could put them at unicorn status—a valuation of $1 billion or more—“relatively soon.”
Another tradeoff for Juxtapose: Some of the most notable and successful venture capital–backed companies were ridiculed as unnecessary, but managed to get a surprising level of consumer interest later in their development. Social media app Snap, whose main draw is disappearing photos, is now valued at $88 billion, for example.
And Chun acknowledges that with its strategy of targeting industries that appear to fulfill a need, it could miss such bets.
“To be frank, yes. And that’s a tradeoff in our model,” he says, referencing Clubhouse, another social media startup that has recently hit its stride amid the pandemic. “I’m not arguing venture capital is broken, but not every business is the same. Clubhouse and Snapchat should be founded by crazy entrepreneurs with crazy ideas where there’s no market, but consumers love it.”
But Chun says he believes that there are more opportunities out there than just the Snaps and Clubhouses, and that Juxtapose is targeting areas that are large enough that it can still achieve high returns.
“We probably wouldn’t be able to start that,” says Chun. “And honestly we’re okay with that because there are enough opportunities that fit our risk-reward profile.”
While Chun points to private equity’s lower risk profile in creating companies, there are key differences as it seeks bigger venture-like returns. Juxtapose doesn’t demand that its portfolio companies be profitable off the bat. Instead, it seeks businesses that are able to sustain themselves without additional capital in the short term so that even if things slow down or the market sours, “we can still have a business that can shift to profitability very quickly.”
And while Chun hasn’t declared war on the venture capital industry—he sees Juxtapose’s strategy as another option in addition to the traditional industry—he is declaring war on existing Fortune 500 businesses.
“We think that we can build $5 billion, $30 billion companies in the largest industries,” he says. “Our goal is for every company to be an industry killer.”
