February 21, 2024

In 2023, funds of funds (FoFs) are on track to raise the fewest funds in more than a decade. Meanwhile, a downturn in venture deal activity has led many firms to abandon follow-on funds. Despite these dual trends, a budding fund manager hopes to succeed with a fund that targets both trends.

Level Ventures raises $104 million for its debut fund, a data-driven, three-pronged investment strategy that uses in-house algorithms to support other emerging managers investing in promising companies from their portfolios , and find deals on their own.

Albert Azout, Level’s co-founder and managing partner, told TechCrunch that the fund was formed based on a market opportunity he noticed when he was a partner at Cota Capital.

He told TechCrunch that many family offices (including his own) have reaped handsome returns from backing small and emerging venture capital funds, and found further success by co-investing with these firms in their portfolio companies. He decided to launch Level to see if the strategy could be institutionalized and succeed when data-driven.

“We want to break the ice on the LP side,” Azut said. “Most LPs, even the funds and institutions within funds, tend to underutilize technology. We want to build something that is powered by technology and allows us to better understand the ecosystem.”

The first key to making the strategy work, says Azut, is finding the right fund manager. Level is aimed at emerging managers focused on areas such as enterprise automation, deep technology and life sciences. Within these categories, the firm uses its internal data model to score companies based on areas such as the number of seats their investors have on the board, who they connect with online and where they invest.

“We spend a lot of time making sure our fund manager selection is the best,” Azut said. “Many early iterations of the technology were building a model and methodology to produce managers in the top quartile. But the performance of early managers varied wildly. Trying to find the best funds was a moving target.”

The firm wants to back funds under $150 million that are either fairly institutionalized (perhaps in fund two or three) or solo general partners that bring in more than just capital. Companies Level has backed so far include Air Street Capital, Emergent Ventures and Work-Bench.

From there, the firm hopes to use its data prowess to keep tabs on underlying portfolio companies to discover which startups make sense to invest in itself when Level goes out to raise its next funding round. Level is also giving its fund portfolio access to the same data it uses.

Level’s approach to building data solutions to find and find companies fits perfectly with a trend that’s starting to grow in venture capital. More and more companies are looking to build algorithms to spot deals they would otherwise miss or wouldn’t.

“We’re seeing more and more companies adding automation and data to their procurement processes, and that gives you alpha,” he said. “If you don’t have data capabilities, you’re at a disadvantage from a procurement perspective.”

But the company isn’t 100% letting data dictate everything. While data is great for narrowing things down, there are always people involved — just proof that this is a people-centric industry, Azut said.

What sets Level apart from other companies looking to add data is that for much of their immediate strategy, the data doesn’t help them cast a wider net to find better companies, but mostly to find what they think will be company of. The most successful of the investors they have backed. While this does make it possible for companies to hit a double home run if the companies they back through their managers end up being notable successes, it also means the companies fail at least twice as much for the companies backed through their funds.

The firm is currently evenly split between funds and companies, but plans to change the second fund to 75 percent fund investments and 25 percent company investments. For now, it hopes this strategy will help unlock the best of both the fund and direct investments.