Funding First-Time Venture Funds

I’ve consulted to a couple of emerging venture managers and first-time funds, so the following excerpted email from an LP to Dan Primack about emerging venture fund managers caught my eye. Among its other merits, the piece is true and is therefore highly useful reading for would-be venture teams. (Note: I’ve reflowed it to make it more readable):

I’ve seen too many entrepreneurs who have founded a company or two, or even worse, a group of I-bankers, hang out a shingle and say “We’re a private equity firm.” Guess what? it ain’t so. Multi-tasking across several investments simultaneously, dealing politically with VC syndicates and serving on multiple boards, really knowing what to do when a company is in trouble, knowing how to run a fund by properly creating reserves for follow on rounds – all of this is apprenticeship work you learn by working at a private equity firm.

As an LP, I’m taking enough risk on backing a new team with a new team dynamic without also providing a kindergarten for investment professionals. Almost no investor group I know of invests in this type of program.

And in my opinion, a friends and family fund of $5m answers some questions (can the two GPs work together without killing each other?) but it doesn’t answer the question of whether or not they can effectively source and invest larger amounts of money.

The dynamic of investing $100,000 into a deal are very different than $2.5 million — Do syndicates want you at a larger amount? Can you handle board seats? Also, critical mass – if you only have two GPs, what happens when one is hit by a bus? An entrepreneur as part of a team is fine. An entire team without private equity experience? No way.

Related posts:

  1. Flight to (Perceived) Quality & First-Time Venture Funds
  2. Performance Persistence at Venture Funds
  3. Buyout Funds Getting Big — Really Big
  4. New Venture Funds? Who Needs ‘Em!
  5. Hedge Funds Work Worst When You Need Them

Comments

  1. Good post Paul!
    Hmmmm….definetely got me thinking because we’d be the kind of entrepreneurs-turned-investors that’s being talked about.
    The basic idea of what we’re about is that entrepreneurs are invested heavily in private equity, so it makes sense to diversify, get a portfolio happening, and focus to recruit senior management.
    The problem I am trying to correct is one of basic risk management. How can one man cope with the vast majority of his assets being locked up in just one stock?
    I dunno…how else can entreprenurs manage their exposure?

  2. David Upton says:

    Having had experience of a VC fund (set up by a well respected academic institution in the UK) that clearly didn’t know what to do when my venture got into trouble, I may be a bit jaundiced. We felt our VCs were an obstacle every step of the way… I’m sure this was partly our naivety, but the experience was combative rather than supportive. So I agree with you about over-optimistic small private equity funds. But where else is the small enterprise to go for small amounts of capital and intelligent support/ mentoring?