The Institutional Investor Challenge for Local Venture Funds

Continuing with last week’s post on The Conundrum for Regional Venture Investors, there’s another element of the message that needs further clarification. First, there’s the concept of More Venture Capital vs More Local Venture Capital where many business leaders express the desire for more venture capital in the region and they’re really saying that they want more locally-based venture firms in the region. Second, and the topic for today’s post, is that to have large local venture funds, institutional investors like pension funds, university endowments, and foundations are required. Unfortunately, tapping into local high net worth individuals will only support small-to-medium-sized funds.

Here’s the ideal lifecycle to raise a large venture fund:

• Raise a $15M fund from local high net worth individuals and family offices
• Deploy the capital over 3-4 years and show great paper returns (30%+ IRR)
• Raise a $75M fund from local investors and some institutional investors and repeat the deployment timeframe and success
• Raise a $150M fund from local investors and a number of institutional investors and repeat the deployment timeframe and success
• Raise a $300M fund from mostly institutional investors and build an enduring top-tier partnership

Starting from scratch, and executing perfectly, this is a 9-12 year journey to have the necessary success to then raise a large venture fund from institutional investors. Without a substantial track record, most institutional investors aren’t interested. Communities that want larger, local pools of venture capital have to understand how institutional investors play a major role. 

What else? What are some more thoughts on the institutional investor challenge for venture funds?