L2VC

What is VC? The lifecycle of a fund

I realize that, despite having kept this blog for a number of months, and using it to chronicle my learnings about venture capital, I haven’t actually explained what venture capital is or how the lifecycle of a fund works. I’ve dropped tidbits here and there but I figure its time to link this together in a full on post.

So here are some of the high points of how it works:

• Venture Capitalists (Sometimes called General Partners) look for commitments from High Wealth places (Banks, individuals, funds)
• Most funds operate on a 10 year lifecycle. You have five years to spend the commitments, and five years to return them.
• Usually 2% of the fund is allocated for salary, to pay employees, and overhead. Then there’s a 2% management fee (both of these are yearly). So on a $100 million fund, you have $80 million to invest, and $20 million to cover expenses (you have to commit it all by the 5 year mark).
• When you look at statistics, funds usually spread to a 3-4-3 scenario: 30% of fund investments tank completely, 40% are lifestyle businesses, 30% are “homeruns” if you’re lucky.
• Most funds commit to return 8% to their LPs at the end of the 10 years. The VC gets to keep 20% of what’s left. 

In my next post, I’ll talk more about basic strategies around deploying funds, and what entrepreneurs should be aware of. 

This is the most important thing I have learned so far as a venture capitalist. A lot of the time, this is what you do. Awesome things like learning about new technologies or talking to really smart people or serving on boards, or hanging out at the latest tech event are only about 30% of the job. They become more central to everyday VC life when you get into the portfolio management phase of your fund.

At the beginning when you’re deploying capital, you’re just hearing pitches, receiving business plans, and a lot of the time, saying no. Even when you walk down the street, people just stop you and want to pitch you. When I was in San Francisco a couple months ago, a VC I was talking to complained about being pitched once when he went to the grocery store with his daughter.

In the Pitch – First of all, its important to have dynamic pitches, to ask the entrepreneur lots of questions as they’re pitching to you. The nature of your questions and their responses will also help prime them for how you’re feeling, especially if you’re leaning towards a “no.” You don’t ever say no in the pitch, and I’ve heard of VCs throwing people out mid-pitch which I honestly think is bad practice and makes you look like an asshole. Everyone deserves to have their idea considered. How long they deserve to be considered is a different story. Post pitch, if you brought the deal in, you owe not only a “no” to be delivered at least via phone, but its also good, especially if you have gotten to know the company to provide at least some constructive feedback. Not pages and pages, but 5-10 bullet points.

Business Plan/Cold Reach out – review it. You never know what you might find. Honestly, 90% of them are garbage, I have yet to receive a good cold reach out. Theoretically its because you need some context to really understand what’s going on. A lot of them are just terrible. Because they came in cold, its fair to follow up with an email. Sometimes I like to call, if I’m not 100% certain, just to get a better feel for the person over the phone.

Walking down the street – this one is at your discretion. Because you’ve been cornered, its your personal time, you get to chose when/how you want to exit. Usually just throwing them a card and saying you need to run works, or if you’re really not interested, you can bluntly say so on the street.

One final thought, be aware of how the community you work in operates. Here, the tech community is very small, you need to be sensitive to how you turn someone down. You also don’t want to be disparaging because you want the entrepreneur to come back to you when they move on to their winning idea.