Growth Investing with Westerly Winds: An Alternative Approach to Multi-Stage VC

In an effort to expose BuiltWorlds’ member investors and startups to a variety of investment strategies, our Venture and Investment team is launching a series to highlight different approaches. The following briefing explores an innovative take on growth-stage investing.

With built world technology adoption still being early in its lifecycle, much of BuiltWorlds coverage, from an investment perspective, has been focused on the early-stages. As built world tech begins to mature, how are growth investors playing a role and what strategies do those investors employ?

One fund is providing an alternative approach to multi-stage VC by supporting later-stage companies with more than just capital as they scale to an exit.

Background

Westerly Winds, a London, UK and Austin, TX-based “early growth-stage” fund, was founded by BlackRock alum Karim Abdel-Ghaffar Plaza and Edward van Cutsem. The founding partners held various senior roles at BlackRock (and predecessor firms), including the creation of the BlackRock Family Office Partners group. The fund draws on this experience to take an active approach to growth-stage investing.

The fund invests at the intersection of VC and growth equity, typically looking to participate at the Series A and B stages, hold board seats and equip founders with the tools to prepare for a meaningful exit. As Plaza explained it, Westerly Winds is looking to take startups “with product market fit and sustainable unit economics through the scale-up phase and eventual exit.”

“There’s always a buyer for quality businesses out there,” Plaza says,“Our role is to help develop our portfolio companies into businesses others want to buy, irrespective of the market cycle.”

The Approach

Coming from the world of buyout investing, Plaza and van Cutsem were able to carve out a market niche in the VC space due to the rise in near-zero interest rate-fueled capital tourism—the process of investors moving from one asset class to another in search of better returns–that dominated the post-Great Recession capital markets. More investors demonstrated an appetite for VC with high startup valuations and a ripe exit market due to private equity, IPOs and special purpose acquisition companies (SPAC). This trend accelerated up until 2022 when something had to give.

An abundance of liquidity leading into 2022, resulted in a rise of multi-stage VC investing—investors participating in follow-on investments from the early-stage until exit in order to maximize returns. Multi-stage VC is a “power law” driven approach that is particularly relevant to early-stage investors. This strategy suggests a highly skewed distribution of returns where a small number of successful investments provide the bulk of the returns to the portfolio.

Higher for longer rates have revealed the cracks in the glass for the multi-stage VC model. With low startup valuations and sparse exit opportunities–driven by an IPO market that was effectively closed, limited PE buyout activity and companies remaining private for longer–startups struggled to raise follow-on investments. The macro pressures applied to the market in 2023 suggested the need for new approaches to follow-on investments and brought power-law driven strategies into question.

“When a company hits commercial proof points—right when you go from an idea and a concept to a commercial reality, albeit emerging—there’s a decision that every company takes: Do you go down the multi-stage VC route with a view to become an outlier or look how to efficiently scale the business?”

Westerly Winds’ departure from the dominant multi-stage VC strategy occurs at this inflection point. Power-law driven investors can be incentivized to continually finance the company that seems to be at the head of the pack for four, five, six consecutive rounds. In less capital-constrained environments, there is less of an incentive to “go deep into companies and really help with governance, stewardship and transformation.” This partially explains the frenetic rise and fall of VC activity between 2022 and 2023.

The Value Add

Westerly Winds aims to provide the alternative to multi-stage VC for startups at their pivotal moments, the Series A and B stages when the institutionalization process begins. The fund aims to coach developing companies on finding their strategically optimal buyer. The fund executes on this value proposition with a three-pronged approach consisting of time, active board governance and education.

Without hesitation, time commitment was the first subject that came to mind for Plaza when asked about Westerly Winds’ most valuable resources and it remains at the core of its active governance strategy.

“There’s no substitute for committing time to a business. Sitting on 20 or 30 boards is different than sitting on three or four boards,” says Plaza. “The amount of time you can dedicate to each company really conditions how knowledgeable you become in the inner workings of a business and therefore how helpful you might be as a company evolves.”

Time enables the fund to execute on its core competency: active board governance. Westerly Winds embeds itself within startups, not just at the C-suite level, but even two to three levels removed in order to understand and impact a company’s strategic direction.

Plaza sums up this approach well with a youth sports analogy: “There might be an adolescent that’s playing in the junior leagues that is showing a lot of promise, but that doesn’t mean that they’re going to become world champions,” and just cash alone doesn’t get you there. Plaza argues that one thing more important than capital is “having the right team around you and a committed coach to help you develop into a winning adult.”

Alongside dedicated time and board governance, Westerly Winds aims to educate its portfolio companies on the scaling process. Oftentimes, it takes an entirely different skillset to engineer a product than it does to scale it and manage a team of entrepreneurs. By providing education and stewardship to management teams, growth-stage investors are able to help founders bridge this gap.

Advice to Startups

Westerly Winds founding partner Karim Plaza imparts a piece of advice on how to approach fundraising that resonates with built world startups.

“More often than not, there’s this belief that no matter what stage, you have to show a hockey stick in order to get funding and I don’t think that’s the case.”

Plaza advises founders to create “the most honest and accurate depiction of what you believe your business to be and then use that to find the most adequate investor for your business at any given point in time.”

A recurring theme of venture investing discussions at BuiltWorlds is managing expectations when investing in built world startups. This is critical in an industry where adopting technology requires proof and justification from the business unit level. Hockey stick growth is typically unrealistic in this industry, which is why adhering to an accurate portrayal of growth is critical for startups to find the right inventors and strategic partners.

Plaza adds, “Crawl, walk, run. Whatever it is that you say you’re going to do, do it thoughtfully, and hold yourself accountable to it.”

What This Means for Built Environment Startups

Although Westerly Winds follows a generalist investment thesis and has just three built world portfolio companies (LeaseLock, Cofi and Nodes & Links), this investment strategy might be applicable to other built world startups as the tech ecosystem begins to mature.

Startups reach a fork-in-the-road moment where it evaluates its long-term vision and how to best achieve that. If the goal is to be Facebook, then the startup can bet on itself through the multi-stage VC approach; if the goal is to take advantage of commercial traction and scale to become a viable market product, an active growth investment might be a better fit. That we’ve seen few AEC tech IPOs to date suggests the latter option to be more in-line with startups in this industry.

Westerly Winds’ approach is predicated on the idea that there is an ideal buyer out there somewhere—startups just need the extra guidance in becoming the ideal target. This is a viable strategy compared to building a company with an IPO-or-bust mindset.

Plaza sums this up well, “If you build a company that others want to buy, you build something of value. If you build a company that you can sell, it’s typically a function of the market; the market is either there or it isn’t, which for a manager is uncontrollable.”

Westerly Winds strategy can apply to CVCs and strategic investors as well. Who is better positioned to provide the resources needed to create valuable businesses than corporates? By applying the active governance approach to strategic investing, corporates can achieve strong strategic partnerships and financial returns, while also providing significant value to startups.