Month: October 2010

Venture Capitalists Have to Beg for Money, Too

I was at the semi-annual Village Ventures meeting last week in Boston. Bo Peabody, the founder of Tripod (sold to Lycos) and Matt Harris, a black-belt VC professional, founded Village Ventures back in 1999.
 
Village runs its own venture funds but also serves a network of targeted local VC funds. Village provides backend services for those funds and, as importantly, helps with deal flow, diligence and overall market intelligence.
 
I learned a ton over the course of two days. Not so much about the investing side of venture capital but about the fundraising side: people often forget that VCs occupy the same position as entrepreneurs for much of their professional lives, i.e., asking other people for money.    This blog (and others) talks a lot about investing, entrepreneurs, the startup ecosystem, etc. but, before a VC can invest, he/she has to raise money. That means pitching to Limited Partners – pension funds, endowments, family offices, wealthy individuals, etc. — and asking them to invest.  It's as tough for us as it is for entrepreneurs.
 
Fundraising from LPs is a whole world unto itself and it changes all the time. Since we (Arpex) are currently raising a fund, I found the real-time information on the current fundraising environment invaluable.
 
Below, I share some random notes from the conference but, first, an aside: on the first night, I ran into Brad Pitt (literally). As I opened my door to run to dinner, I almost knocked him over. He was about to knock on my door – he and another guy were looking for someone and had the wrong room (I was 1410, they were looking for 1401).     After a brief mutual apology, they moved on to the double-door suite at the end of the hall. 
 
Kind of a strange moment — great conversation starter at dinner…
 
Now to the venture capital notes:
 
1.     Venture fund managers always have a hard-time raising their first fund but second and especially third funds can be even more difficult. With a first-time fund, you can sell the team, the fund strategy, the vision, etc. In the latter cases, you have to show actual investment results. Given the VC market of the last ten years, that’s a difficult thing to do.
 
2.     Super-angel investing does not work unless there is a massive updraft in the sectors. In other words, you can make a living as an angel investor if companies grow consistently and valuations continue increasing. If not, you are in trouble because a) you don’t have money to bridge your companies during the tough times and b) you will get massively diluted when (if) new investors come in.
 
3.     Leave the entrepreneur alone to run his/her company. If you don’t trust them, fire them and get someone you trust. Otherwise, in the long run, the relationship will fail and so will the company.
 
4.     When discussing specific portfolio companies with Limited Partners, the LPs want to know one thing: the percentage of the total Fund that the portfolio company will realistically return. The benchmark is 50%.   In other words, LPs want to hear that a specific company will, upon exit, return half of the committed capital in the Fund.
 
5.     There are signs of life for VC funds trying to raise capital but LPs are waiting to say “yes” until they absolutely have to: in other words, they want to wait to see what other LPs, if any, are going to invest in your fund before they commit.
 
6.     Part of this “wait and see” attitude stems from the knowledge that the VC industry is going through a correction and many funds will disappear. LPs are waiting to see which VC funds will survive.
 
7.     LPs tend to feel more interested in super-angel funds than traditional VC funds but, unless someone with an excellent reputation is running the fund, the LPs still prefer to wait. 
 
8.     LPs have adjusted their expectations for returns and feel ok with 10% per year into the future. This means they don’t need/want to take as much risk (e.g., by investing in venture capital funds).
 
 
Lots more on the conference in the next post.