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"But an institutional fund is legally required to be a hard-ass." This isn't true in the sense most people think it is. It's true that management must act in t

by burnte 7y ago

"But an institutional fund is legally required to be a hard-ass." This isn't true in the sense most people think it is. It's true that management must act in the best interests of the shareholders, but the legal requirement is more about acting in an ethically or financially defensible way, rather than dollars above all else. It is perfectly legal for management or an investment bank to allow the entity to act in ways that benefit in the long term but not the short term. The greatest example of this in modern business is Amazon. Bezos sees that getting a large, long-term-viable business means putting profits right back into the company, and sometimes even running debt. No where in any laws and regulations is any manager or investor required to sell tomorrow in order to maximize profit today. If a founder in a startup has a wacky idea, but the board/ownership/etc. feel that the plan can work, they CAN permit it with no legal repercussion. Fiduciary duty is about ethical action, not profit, they can't knowingly in a manner that is deleterious to investors/shareholders. And even that low bar is very hard to prove in court.

tlb 7y ago
LPs aren't just shareholders. I wish. LP agreements are hundreds of pages long! A complication with institutional funds is that they raise a new fund every couple years, with a changing set of LPs. So they can't make a deal like "we can write off the investment in your previous company, if you let us invest in your new company" because it's favoring one set of LPs over another. LPs get prickly about that. So a company like Amazon can take lower profits now in return for bigger profits later, but institutional funds can't if they're into the next fund.
- nostrademons 7y ago
  LPs themselves also have basically zero information to go on when evaluating a potential venture fund, other than exits they invested in with their previous fund. And the competition is pretty brutal among venture funds today. So a VC is going to have a very hard time raising money for their next fund if they can't show exits or at least follow-on rounds of funding at substantially higher valuations for some of their previous portfolio companies.

by burnte 7y ago

tlb 7y ago

LPs aren't just shareholders. I wish. LP agreements are hundreds of pages long! A complication with institutional funds is that they raise a new fund every couple years, with a changing set of LPs. So they can't make a deal like "we can write off the investment in your previous company, if you let us invest in your new company" because it's favoring one set of LPs over another. LPs get prickly about that. So a company like Amazon can take lower profits now in return for bigger profits later, but institutional funds can't if they're into the next fund.

nostrademons 7y ago
LPs themselves also have basically zero information to go on when evaluating a potential venture fund, other than exits they invested in with their previous fund. And the competition is pretty brutal among venture funds today. So a VC is going to have a very hard time raising money for their next fund if they can't show exits or at least follow-on rounds of funding at substantially higher valuations for some of their previous portfolio companies.