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1/3 of the raise can be used to pump cash to those who came on earlier funds.

by jsprogrammer 10y ago

deleted 10y ago
[deleted]
mathattack 10y ago
I interpreted it as additional cash for the same fund.
- jsprogrammer 10y ago
  The cash is for "late-stage opportunities" in "portfolio companies".
  - bing_dai 10y ago
    Yup. It's called "reserve". VCs often reserve a minor portion of the fund (~30%) for investing in future rounds of the fund's existing portfolio companies.
  - mathattack 10y ago
    It's to avoid negative signaling that may occur if a VC firm doesn't invest in subsequent rounds.
gumby 10y ago
Most fund agreements prohibit cross-fund investment, mainly because it's an incentive for fund n+1 to be used to prop up losing investments from fund n, deferring the day of reckoning.
- jsprogrammer 10y ago
  Maybe. AH doesn't appear to roll that way.
  - gumby 10y ago
    Really? That's interesting, though not unheard of. I haven't seen their LP agreement of course. There are actually two reasons why LPs typically don't want to agree to this. The first is that most funds focus on a specific stage (early, late etc); typically early stage funds want to invest through the entire cycle (so if firm X puts $5M into your A round they plan to put a total of, say, $20M through the liquidity event). But a later stage fund might want certain investment criteria (expansion, growth, whatever the partners come up with) and don't want it used for "familiar" deals that might not fit that thesis. The main reason, the one I mentioned above, is propping deals up. the big driver for this is that the IRR numbers are completely made up based on judgement, which has to be the case as most of the fund will be tied up in illiquid investments. However the people making the decision is conflicted -- they are the fund GPs and of course want to look good to get new investors into their next funds. You shouldn't assume they are corrupt or malevolent: inherently they can't be dispassionate, otherwise they wouldn't be qualified to be supporting their portfolio companies through thick and thin. But this is why firms are unhappy about CALPERS releasing IRR numbers, or why Fidelity might legitimately (publicly, as they are required to) mark an investment down while the venture firm might just as legitimately consider it higher in value -- and different venture firms could even disagree. So the poor incentive cross-fund investing provides is that a fund that is struggling, especially a zombie fund, might want to bridge some of its firms via an investment from a newer fund in the hopes that things might turn around. This incentive is even stronger during a negative macro event (i.e. a recession). An LP in the new fund doesn't want to see its good dollars following bad, it wants the money in new, promising investments. Now if you are a big firm and can throw your weight around, or have some unicorns that everybody is clamoring to get into even at a nosebleed valuation, then you might be able to get the LPs to permit cross-fund investments. But you might not even want it (don't forget the GPs will likely be different in the different funds so their interests might not even align. So: quite uncommon but not unheard of.
    - jsprogrammer 10y ago
      The prior information was as according to the article. Supposedly, $0.5 billion must be committed for such use (though, it may not be). I don't think it requires corruption, or malevolence; only a source of cash, and a desire to get cash to prior investors.

1/3 of the raise can be used to pump cash to those who came on earlier funds.

deleted 10y ago

[deleted]

mathattack 10y ago

I interpreted it as additional cash for the same fund.

jsprogrammer 10y ago
The cash is for "late-stage opportunities" in "portfolio companies".
- bing_dai 10y ago
  Yup. It's called "reserve". VCs often reserve a minor portion of the fund (~30%) for investing in future rounds of the fund's existing portfolio companies.
- mathattack 10y ago
  It's to avoid negative signaling that may occur if a VC firm doesn't invest in subsequent rounds.

gumby 10y ago

Most fund agreements prohibit cross-fund investment, mainly because it's an incentive for fund n+1 to be used to prop up losing investments from fund n, deferring the day of reckoning.

jsprogrammer 10y ago
Maybe. AH doesn't appear to roll that way.
- gumby 10y ago
  Really? That's interesting, though not unheard of. I haven't seen their LP agreement of course. There are actually two reasons why LPs typically don't want to agree to this. The first is that most funds focus on a specific stage (early, late etc); typically early stage funds want to invest through the entire cycle (so if firm X puts $5M into your A round they plan to put a total of, say, $20M through the liquidity event). But a later stage fund might want certain investment criteria (expansion, growth, whatever the partners come up with) and don't want it used for "familiar" deals that might not fit that thesis. The main reason, the one I mentioned above, is propping deals up. the big driver for this is that the IRR numbers are completely made up based on judgement, which has to be the case as most of the fund will be tied up in illiquid investments. However the people making the decision is conflicted -- they are the fund GPs and of course want to look good to get new investors into their next funds. You shouldn't assume they are corrupt or malevolent: inherently they can't be dispassionate, otherwise they wouldn't be qualified to be supporting their portfolio companies through thick and thin. But this is why firms are unhappy about CALPERS releasing IRR numbers, or why Fidelity might legitimately (publicly, as they are required to) mark an investment down while the venture firm might just as legitimately consider it higher in value -- and different venture firms could even disagree. So the poor incentive cross-fund investing provides is that a fund that is struggling, especially a zombie fund, might want to bridge some of its firms via an investment from a newer fund in the hopes that things might turn around. This incentive is even stronger during a negative macro event (i.e. a recession). An LP in the new fund doesn't want to see its good dollars following bad, it wants the money in new, promising investments. Now if you are a big firm and can throw your weight around, or have some unicorns that everybody is clamoring to get into even at a nosebleed valuation, then you might be able to get the LPs to permit cross-fund investments. But you might not even want it (don't forget the GPs will likely be different in the different funds so their interests might not even align. So: quite uncommon but not unheard of.
  - jsprogrammer 10y ago
    The prior information was as according to the article. Supposedly, $0.5 billion must be committed for such use (though, it may not be). I don't think it requires corruption, or malevolence; only a source of cash, and a desire to get cash to prior investors.