Austin—BuildGroup, a firm dedicated to investing in young software startups, announced Tuesday that it has raised $330 million.
The investors are individuals from Texas, Colorado, and Utah, said Lanham Napier, BuildGroup’s co-founder and CEO. Napier, former CEO of Rackspace Hosting in San Antonio, TX, said he contributed about $30 million of that total.
When BuildGroup was founded in 2015, the original investors were Napier and fellow Rackspace alumni Jim Curry and Klee Kleber, along with Pete Freeland from General Catalyst. “We realized with our own money we could do three or four companies, but if we bring in more investors, we could do 10 companies,” he said.
BuildGroup plans to invest in a total of 10 to 12 software companies in total and has already put $57 million into four startups: CDSC, Anaconda, Flex, and Valkyrie Labs—which cater to both enterprise and government customers.
The aim, Napier said, is to stay within the founding investor group’s “circle of competence”: selling businesses products and services in infrastructure software, cognitive analysis, and cybersecurity, and that serve vertical industries like state and local governments.
For Napier, the key distinction between BuildGroup and other investors is that it doesn’t follow the traditional venture capital model, which he says values quick exits over creating sustainable companies for the long-term. “Anytime you see a successful company built, you have a core group of leaders,” he said. “Our view is that you need the same thing in the investor base. That’s why we are a holding company, not a fund. We’re going to be a core part of the team, from the early days.”
Instead, he says BuildGroup will make investments “as a permanent source of capital,” funding that will not pressure startup founders to seek milestones like exits in three to five years. Essentially, BuildGroup takes a varying degree of equity from the startups in exchange for its investment. BuildGroup’s investors, including the founders, don’t take stakes in the individual startups. Instead, for their investment, the investors receive what the company calls “preferred units” (as a private company, BuildGroup, of course, doesn’t have stock) in BuildGroup itself.
BuildGroup isn’t the only set of investors seeking to tweak the way in which early-stage startups are funded. Earlier this year, Andy Tryba, an Austin-based serial entrepreneur, announced he was starting Think3, a $1 billion private equity fund. Unlike BuildGroup, Tryba wants to encourage founders to seek exits quickly in order to learn lessons and apply them to the next startup. And in 2016, Lew Moorman, another Rackspace alum, co-founded Scaleworks, which he describes as a mix of venture capital and private equity, or “venture equity.”
BuildGroup will make investments in the $10 million to $15 million range at first, and possibly follow up with another $15 million over a 15-year period, Napier said.
BuildGroup’s investors get that, he added. “It was fascinating to me; the only investors who want to go on 15- to 20-year missions are people who have already been on 15- or 20-year missions,” Napier said. “They are all super successful entrepreneurs that built their business over a 15-year period.”
