With a great deal of focus on entrepreneurs raising money from venture capitalists, it’s important to step back and look at how it works to be an investor in a venture fund.
Here’s how it works as an investor in a venture fund:
- Venture capitalists can’t (yet) publicly advertise to solicit money so it’s done as a traditional sales process through the usual channels like warm introductions, cold calls, and emails
- When an investor commits to invest in a fund there’s substantial paperwork to become a limited partner, especially regarding the type of accredited investor
- Money committed to the fund by the limited partner, say $250,000, is requested in increments via capital calls over the life of the fund (typically 5 – 7 years)
- Capital calls are usually once or twice a year, depending on frequency and size of investments as well as credit facilities (venture funds can usually borrow a limited amount of money to fund a deal while they wait for money from capital calls to come in)
- Money committed by the investor isn’t always paid in if the fund has one or more exits early in the life of the fund as the money generated via the sale of a portfolio company can be used for future investments
- Money invested in the fund is illiquid for the life of the fund until there are exits or dividends (rare)
- Ultimately, the goal is to be completely done with the fund after 10 years, but some go on much longer than that
As you can see, investing in a fund is very different from investing in the public markets. In return for a lack of liquidity for an extremely long period of time, the goal is to receive returns that are greater than and uncorrelated with the public markets.
What else? What are some other thoughts on how it works to be an investor in a venture fund?