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.