Momentum Ventures: Helping start-ups start up

Momentum Ventures is a Venture fund in Los Angeles, CA, that funds early stage start ups, to get them ready for traditional VC investment. Rabinder Sekhon of Sekhon Advisers, writes about the fund, its investment strategy, and the work it does in getting start ups to the next level.

momentum ventures logo

As some first time entrepreneurs may already have experienced, attempting to get through to a VC with the hopes of securing a Series A round is really tough to do right now. There is a funding void left by VC firms shifting their investments downstream. This has left many unseasoned entrepreneurs to fend for themselves to bring great ideas to fruition.

Filling this void is Los Angeles based Momentum Venture Partners, founded in 2004 by a pair of veteran start-up executives - Matt Ridenour and Andy Wilson. Momentum works closely with a company’s founders to shape their business plan, find experienced management, finalize a product and gain customers - a process that typically takes about nine months to complete. At that point, they pitch the company to VCs with hopes of securing a $4 million to $5 million Series A round.

Picture courtesy Momentum Ventures

Momentum’s distinctive model dedicates far more time than a typical angel or seed-stage investor while also assuming considerable risk. A typical assignment begins with a six weeks first phase - usually for a fee of less than $20,000 - validating a business plan, building chemistry with the founder and carrying out due diligence before committing to the start-up. Upon approval, one of four Momentum partners then takes on an interim CEO role, moving the founder to the chief technology officer role. During the process, Momentum provides a bridge loan - typically $250,000 to $500,000 from a bridge fund pooled from high net worth individuals - to keep the company operating, all for a ‘nominal’ monthly stipend.

momentum ventures Andy Wilson, Stuart MacFarlane, Katic Cameron, Matt Riedenour, Dan Tamkin, Scott Shapiro of Momentum
Andy Wilson, Stuart MacFarlane, Katie Cameron, Matt Ridenour, Dan Tamkin, Scott Shapiro of Momentum Ventures

Unlike a traditional VC who might split his/her time with many companies, Momentum partners typically work with, at the most, two companies at a time spending half of their time on each, with an operating associate subbing in the other half as a project manager and director of operations. Momentum’s ultimate goal is to deliver the company to venture capitalists and secure that first round of capital, when the firm’s bridge investment converts, often at a discount, into Series A preferred stock. It’s at this point the firm gets paid for its work after having deferred the majority of its management fees during the previous nine months.

So far all seven of its start-ups have made it to the Series A level, focusing on Los Angeles-area technology companies that require less than $10 million in funding to break even on a cash-flow basis. The seven have raised a total of $30 million in Series A funding. The firm had its first exit in 2006 when Discovery Communications Inc. acquired Academy123 Inc., which had raised a $5 million Series A round the year after Momentum brought the company to venture firms Arcturus Capital and Hanseatic Group.

Momentum is especially beneficial to VCs because it’s bringing only companies with proven business models and customers. From the point of view of the entrepreneur, Momentum understands what VCs want and helps clear up legal and other issues that prove invaluable to companies who make the grade to be part of the Momentum portfolio.

WSJ also covered Momentum Ventures this morning.

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