4 ms·

The real significance of this article is related to the inside baseball of how most venture funds work. See this: http://www.theequitykicker.com/2011/01/12/how-

The real significance of this article is related to the inside baseball of how most venture funds work. See this: http://www.theequitykicker.com/2011/01/12/how-does-the-structure-of-the-vc-industry-impact-investment-strategy/ http://www.theequitykicker.com/2011/01/12/how-does-the-struc... to learn more. In brief: Most venture funds are closed-end funds, with a certain amount committed up front from LP's, where each dollar can only be invested once. The fund stops making investments after 5-7 years, then closes down entirely after 10 years. After 10 years, the managing partners stop collecting their 2% management fee, and any additional returns aren't typically included in the performance of the fund. As such, there's a huge incentive for fund managers to invest early, and find an exit within the time horizon of their fund. A VC who pumped a ton of money into an early stage Uber in 2014 in year 6 of their fund, is going to be pretty screwed if Uber decides not to go public for another 5 years from now. Where this could go sour is that these same fund managers are spending years 9-10 passing the hat to raise money for their next fund. If the typical pool of investors still have a lot of money tied up in previous funds, then they're going to be less likely to ante up for the next fund, since they'd have to double down on VC as a proportion of their portfolio. It's also going to be a tough road show if your story is that you invested millions of dollars in your last fund and it's all still tied up ...

JumpCrisscross 10y ago
> It's also going to be a tough road show if your story is that you invested millions of dollars in your last fund and it's all still tied up Depends on what you promised those investors and how the fund is doing. Nobody complains about being in SpaceX or Uber.
vessenes 10y ago
In practice, this is not the major pain point I think you are calling it. The letters I read often have variants of "We've returned [0.8-2.5x] capital and still have [Uber] in the portfolio!" What may be painful is not being able to at least return capital by the end of the fund without a WONDERFUL story about coming liquidity. Current industry average 10 year IRR is 10% according to Cambridge Associates. You've really fucked things up badly if you can't return capital in year 9/10 on a 10% IRR.
- uiri 10y ago
  To save others the trip to Wolfram Alpha: Assuming money is put into the fund in year 0, a return of 2.35x capital in year 9 or 2.6x capital in year 10 is required to get a 10% IRR.
  - deleted 10y ago
    [deleted]
- prostoalex 10y ago
  Distributing shares of a private company at fund liquidation is not unheard of either. In some cases (Box, Groupon, LendingClub) distributing early at private valuations allows to record a better IRR than subsequent public valuations.
- benmathes 10y ago
  Is that real return? (i.e. adjusted for inflation) Or even better, is that comparative performance, i.e. 10% better than a vanguard index fund?
epc 10y ago
I'm an LP in three venture funds. Typically there's an initial capital call when we commit to the fund, then 25% per year (you can end up with two capital calls in the first year depending on timing). The funds I invest in focus on very early rounds (seed or Series A) for initial investments, keeping $ in reserve for follow–on investments. After about 18-24 months they raise the next fund. With the GP I work with there's almost no overhead, just two GPs and the annual accounting. The annual accounting and tax filings can cause additional capital calls (small amounts, US$1500-2000). As an LP (and a tiny one at that), one of the problems I'm seeing is that companies are raising ever larger up rounds at ever increasing valuations, giving away massive preferences to the later investors. This boxes the companies into seeking either grandiose exits justifying the valuations, or they wipe out the early investors (and employees) because of the preferences overhang with the finial investors (typically institutional money). It's been an eye opening experience, I've learned a lot. Unsure how much more money I'll commit to investing this way though.
- ma2rten 10y ago
  How do you get into this line of business, do you need to have a lot of connections to Wall Street already?
  - mikeyouse 10y ago
    An individual LP in a fund is typically just a wealthy person. Historically the term was an accredited investor which was a legal definition that set minimum wealth/income standards. This changed recently with the JOBS act but I haven't kept up with the latest requirements. Often times they are former entrepreneurs or high income individuals (lawyers, doctors, corporate VPs, senior engineers etc).
  - epc 10y ago
    In my case: I knew a guy who wanted to start a venture fund, and he focused on an area that appealed to me (mix of IOT, healthtech, weird stuff). I qualify as an accredited investor (in the US). And I have a small amount of money I'm willing to set fire to in the hope that a chunk of it has excellent returns. So far across three funds (with same GP), Fred Wilson's 33/33/33 split is holding true.
joshwcomeau 10y ago
For others wondering what an LP is: http://www.investopedia.com/terms/l/limitedpartnership.asp http://www.investopedia.com/terms/l/limitedpartnership.asp

JumpCrisscross 10y ago

> It's also going to be a tough road show if your story is that you invested millions of dollars in your last fund and it's all still tied up Depends on what you promised those investors and how the fund is doing. Nobody complains about being in SpaceX or Uber.

vessenes 10y ago

In practice, this is not the major pain point I think you are calling it. The letters I read often have variants of "We've returned [0.8-2.5x] capital and still have [Uber] in the portfolio!" What may be painful is not being able to at least return capital by the end of the fund without a WONDERFUL story about coming liquidity. Current industry average 10 year IRR is 10% according to Cambridge Associates. You've really fucked things up badly if you can't return capital in year 9/10 on a 10% IRR.

uiri 10y ago
To save others the trip to Wolfram Alpha: Assuming money is put into the fund in year 0, a return of 2.35x capital in year 9 or 2.6x capital in year 10 is required to get a 10% IRR.
- deleted 10y ago
  [deleted]
prostoalex 10y ago
Distributing shares of a private company at fund liquidation is not unheard of either. In some cases (Box, Groupon, LendingClub) distributing early at private valuations allows to record a better IRR than subsequent public valuations.
benmathes 10y ago
Is that real return? (i.e. adjusted for inflation) Or even better, is that comparative performance, i.e. 10% better than a vanguard index fund?

epc 10y ago

I'm an LP in three venture funds. Typically there's an initial capital call when we commit to the fund, then 25% per year (you can end up with two capital calls in the first year depending on timing). The funds I invest in focus on very early rounds (seed or Series A) for initial investments, keeping $ in reserve for follow–on investments. After about 18-24 months they raise the next fund. With the GP I work with there's almost no overhead, just two GPs and the annual accounting. The annual accounting and tax filings can cause additional capital calls (small amounts, US$1500-2000). As an LP (and a tiny one at that), one of the problems I'm seeing is that companies are raising ever larger up rounds at ever increasing valuations, giving away massive preferences to the later investors. This boxes the companies into seeking either grandiose exits justifying the valuations, or they wipe out the early investors (and employees) because of the preferences overhang with the finial investors (typically institutional money). It's been an eye opening experience, I've learned a lot. Unsure how much more money I'll commit to investing this way though.

ma2rten 10y ago
How do you get into this line of business, do you need to have a lot of connections to Wall Street already?
- mikeyouse 10y ago
  An individual LP in a fund is typically just a wealthy person. Historically the term was an accredited investor which was a legal definition that set minimum wealth/income standards. This changed recently with the JOBS act but I haven't kept up with the latest requirements. Often times they are former entrepreneurs or high income individuals (lawyers, doctors, corporate VPs, senior engineers etc).
- epc 10y ago
  In my case: I knew a guy who wanted to start a venture fund, and he focused on an area that appealed to me (mix of IOT, healthtech, weird stuff). I qualify as an accredited investor (in the US). And I have a small amount of money I'm willing to set fire to in the hope that a chunk of it has excellent returns. So far across three funds (with same GP), Fred Wilson's 33/33/33 split is holding true.

joshwcomeau 10y ago

For others wondering what an LP is: http://www.investopedia.com/terms/l/limitedpartnership.asp http://www.investopedia.com/terms/l/limitedpartnership.asp