Venture Capital is a Financial Product

When we due diligence emerging managers, not presenting an investible financial product is the fastest way to come to a “no”. It’s true that you have to make “good investments” (whatever that means), but unless you are only investing your own money, you need to offer a financial product that attracts LPs.

HNIs and family offices need a brand.

For some High Network Individuals (“HNIs”) a strong brand, the halo effect, associating with cool logos, entrepreneurs, or exciting news might be enough.

Institutional investors need a product for their portfolio of products.

I have a portfolio of different private money assets. Your fund is one financial product amongst many. Think about shopping for a mortgage loan, or a venture debt loan for your startup. You do care about the brand of the venture debt lender, their attitude, how they treat their contract partners. But you do care a lot about terms, how they match your expectations, and what expectations the lender has.

The larger the institutional LP, the higher-level their due diligence (usually). When you were shopping for a mortgage loan, did you enjoy it when the agent on the other side went all acronyms on you, or explained some intricate and complicated behind-the-scenes financing mechanics of his business? Maybe. Or would you rather know how that relates to the specific loan you’re trying to get?

Usually, LPs hire you – a manager – to do the managing. That’s why we’re called “Limited” Partners. While I might understand some sectors in detail, I might not want to learn the details of others. I want to diligence that you understand them: can you provide me with some “reasons-to-believe” so I can get comfortable with you managing my money in that sector?

Venture Capital Product Aspects

Here are some examples — different LPs might put different emphasize on them:

  • Team
    • What is the GP commitment? How is that split up between the investment partners?
    • How is the team incentivized?
    • Who are key-persons? On what other products are they working?
    • What organizational risks (within your own firm!) are you specifically managing for?
  • Fund Raising
    • What is your minimum amount you could reasonably operate under? What would change?
    • What is the hard cap? What would change?
    • When is your first / second / last close?
    • Who are your LPs?
  • Initial Investments
    • How many investments are you going to make?
    • Over how many months do you plan to make 85% of your initial investments?
    • What are the risks you are willing to take with your startups, more than any other manager?
    • Which risks are you not willing to take with your startups?
    • What is your target equity %%, if any?
  • Follow-Ons and Exits
    • What is your follow-on strategy and reserves?
    • How do you think about SPACs?
    • What is your follow-on strategy in the last quarter of the fund’s lifetime?
    • What is your capital call strategy?
    • How much capital are you going to call, and when?
    • What is your valuation guideline?
    • What is your recycling strategy?
    • What is your liquidation strategy?
    • What is your distribution strategy after liquidity events, especially if you end up holding public stock (IPO or stock transaction M&A)?
  • Governance and Reporting
    • What is your expected J-curve?
    • What is your reporting strategy?
    • When do you send out K-1 forms?
    • Who do I call when I have a question? What is your target response time?
    • At what point will Partners and associates no longer work full-time on the fund I’m investing in? (aka: what happens when you raise your next fund, and why are you still charging management fee at that point?)

Last but not least: How much does the product cost? Does the price for the product meet my expectations? Venture Capital products (aka “funds”) are just like any other product! Lookup Philippe Bouissou’s “A4 Precision Alignment”. You have to align Perception vs. Message, Pain vs. Claim, Purchase vs. Sale, Delight vs. Offering.

Thoughts? Opinions? Comments? Corrections?