how does deal warehousing work
Deal warehousing involves a fund manager making personal investments in companies before the venture capital fund is set up and reaches its first close. These investments are then transferred into the fund shortly after reaching a first close. The investments are typically transferred at cost and must follow a consistent rule, like "all seed deals in the fund thesis made in the last 12 months". The manager cannot selectively choose which deals to transfer. Warehoused investments need to be disclosed to Limited Partners (LPs) before closing and can provide an immediate markup, incentivizing LPs to invest.
What does MNF clause entitle investor to?
The Most Favored Nation (MNF) clause entitles an investor to the same terms and conditions as the most favorable terms and conditions offered to any other investor. This means that if another investor is given better terms, the investor with the MNF clause is entitled to those same terms. This clause is used to ensure fair treatment among investors.
can a fund based in the uk be domiciled in the us
Yes, a fund based in the UK can be domiciled in the US. The domicile of a fund refers to the jurisdiction under which the fund is legally established and regulated, and it does not have to be the same as the location of the fund's operations or management. Many fund managers choose to domicile their funds in Delaware, US due to its favorable regulatory framework, regardless of where they are physically located or operating. However, it's important to consult with a legal advisor to understand the implications and requirements of different domiciles.
what is it called when venture funds have negative returns in the beginning due to fees
The term for when venture funds have negative returns in the beginning due to fees is called the **J-Curve** effect. This phenomenon is common in venture capital and private equity funds. The J-Curve represents the typical pattern of returns for a venture capital fund, where negative returns are experienced in the early years due to investment costs and fees, followed by potential positive returns in later years as portfolio companies mature and exits are realized.
How do VC firms analyse unit economics?
VC firms analyze unit economics by examining the direct revenues and costs associated with a particular business model on a per unit basis. This includes looking at metrics such as Customer Acquisition Cost (CAC), Lifetime Value (LTV), Gross Margin, and the LTV/CAC ratio. These metrics help the VC firm understand the profitability of each unit (usually a customer) and the scalability of the business model. However, the specific metrics and their importance can vary depending on the industry and business model.
what is the difference between ESG investing and impact investing
ESG investing and impact investing both focus on generating positive societal outcomes, but they differ in their approach and objectives. ESG (Environmental, Social, Governance) investing involves integrating these factors into investment decisions to manage risk and generate sustainable, long-term returns. It doesn't necessarily target specific social or environmental outcomes. On the other hand, impact investing intentionally seeks to create positive social or environmental impact alongside financial return. It targets specific outcomes and measures the impact.
What is the process you would use to apply the Valuation Policy to a portfolio of 20 startups each quarter?
To apply the Valuation Policy to a portfolio of 20 startups each quarter, you would first gather the latest financial and operational data from each startup, including recent financing rounds, revenue figures, and other key performance indicators. Then, you would apply the valuation methodology outlined in the Valuation Policy to each startup, which could involve using market comparables, discounted cash flow analysis, or other valuation techniques. After valuing each startup, you would update the portfolio's overall valuation. This process is repeated each quarter to ensure the portfolio's valuation remains accurate and up-to-date.
what is DPI
DPI, or Distribution to Paid-In capital, is the ratio of actual returns to Limited Partners (distributions) to their paid-in capital. It's a measure used in the venture capital and private equity industry to assess the return on investment.
when should i follow dispersed investment strategy and when focused one
The choice between a dispersed and focused investment strategy depends on your fund strategy. If you're aiming for a lot of shots on goal because you're investing very early, then a dispersed strategy, investing in more deals, could be a good approach. However, if you're looking for more control and deeper involvement in fewer companies, a focused strategy might be more suitable. It's important to align your capital deployment strategy with your overall fund strategy.
what is the difference between participating and non-participating liquidation preference
In venture capital, **liquidation preference** determines the payout order in case of a company's exit.
- **Participating Liquidation Preference**: Investors with participating preference get their initial investment back first during a liquidation event, and then also participate in the distribution of the remaining assets, effectively getting paid twice.
- **Non-Participating Liquidation Preference**: Investors with non-participating preference can either get their initial investment back or participate in the distribution of the remaining assets, but not both. They usually choose whichever option gives them the higher return.
How can I find a job in VC
Getting a job in venture capital can be challenging due to the industry's opacity and competitiveness. However, there are several ways to increase your chances:
1. Networking: Connect with people in the industry. This could be through attending industry events, joining online communities, or reaching out directly to people in VC firms.
2. Gain relevant experience: This could be through working in a startup, gaining investment experience, or developing expertise in a specific industry or technology.
3. Education: Participate in programs like VC Lab that provide training and networking opportunities.
4. Start your own firm: It's often easier to start your own VC firm than to join one at a senior level.
Remember, roles in VC vary, from General Partner (GP) who makes investment decisions, to Venture Partners who provide strategic support part-time, to operational roles in larger firms. Understanding these roles can help you target your job search effectively.
does decile work for Australian investors?
Decile Group's services are not limited to a specific geographic location. However, for specific advice about a jurisdiction, such as Australia, it's recommended to consult an experienced fund attorney in that jurisdiction. It's also important to note that any potential investors should meet the accredited investor criteria.
Can I offer a SAFE for a portfolio company to an LP of the fund?
Yes, you can offer a SAFE for a portfolio company to an LP of the fund. However, it's important to manage this carefully to avoid conflicts of interest. Typically, this is done through a Special Purpose Vehicle (SPV) and it's common to offer this opportunity to LPs for follow-on rounds if there is additional room in the round. Always ensure to maintain transparency and adhere to the terms set out in your Limited Partner Agreement.
How to present exits with future earnouts in dpi and tvpi calculation?
When presenting exits with future earnouts in DPI and TVPI calculations, the future earnouts should be considered as part of the unrealized value of the fund until they are actually received. Therefore, they would be included in the RVPI (Residual Value to Paid-In Capital) calculation, which contributes to the overall TVPI (Total Value to Paid-In Capital). However, they would not be included in the DPI (Distributed to Paid-In Capital) until the earnout is actually paid and distributed to the investors.
What is TAM, SAM and SOM?
**TAM**, **SAM**, and **SOM** are acronyms often used in business and marketing planning to identify the market potential of a product or service.
- **TAM** stands for Total Available Market, which is the total market demand for a product or service.
- **SAM** stands for Serviceable Available Market, which is the segment of the TAM targeted by your products and services which is within your geographical reach.
- **SOM** stands for Serviceable Obtainable Market (or Share of Market), which is the percentage of SAM that you can realistically capture.
These metrics are used to understand the potential growth and revenue of a business in a specific market.
How can you convince LPs to invest in 1st close rather than wait and watch?
To convince LPs to invest in the 1st close, you can highlight the benefits such as a lower minimum check size compared to subsequent closings. You can also offer them the ability to invest in future follow-on rounds into your portfolio companies. Additionally, you can emphasize that the minimum check size will increase in the 2nd closing, providing an incentive for early investment. However, avoid name dropping other LPs as this is considered a major mistake.
are CVCs accredited investors
Corporate Venture Capital firms (CVCs) can qualify as accredited investors if they meet certain criteria. For instance, can qualify if they own investments in excess of $5 million. However, the specific criteria may vary, so it's important for each CVC to verify its status based on the regulations in its jurisdiction.
What are kickers in a venture debt transaction?
The term "kickers" in a venture debt transaction typically refers to additional incentives or benefits offered to the lender. These could include things like warrant coverage, which gives the lender the right to purchase equity in the borrowing company at a future date at a predetermined price. The specifics of these incentives can vary widely depending on the terms of the individual transaction.
when do you distribute capital back to LPs? after each exit, or at the end of fund's lifetime?
Distributions to Limited Partners (LPs) are usually made upon exits. The specific details of distributions are typically outlined in the Fund's Limited Partnership Agreement (LPA). It's important to note that startup investments may take years before a liquidity event occurs. If an investment in a company has not had a liquidity event by the time the fund term has finished, there may be an extension period to wait for an exit or the private shares may be distributed to LPs.
What is a SAFE?
A SAFE (Simple Agreement for Future Equity is a legal document template designed to streamline investments in early-stage companies, reducing the need for extensive legal processes and expenses. It was originally created by Adeo Ressi and popularized by YCombinator to replace convertible notes or priced rounds in early-stage investing. The current templates are maintained by YCombinator and are available on their website.
What's the cost of launching a limited partnership fund in delaware?
The cost of launching a limited partnership fund in Delaware can vary, but formation with a reputable law firm can range from $50,000 to $100,000 or more. Additionally, fund administration costs can range from $25,000/year to over $100,000/year depending on the complexity of the setup. These costs cover legal and administration expenses and are typically variable with traditional vendors.
When are management fees earned?
Management fees are typically earned on an annual basis, calculated as a percentage of the committed capital in a fund. The fees start being earned from the first close of the fund. The exact timing and calculation can vary depending on the terms set out in the Limited Partnership Agreement (LPA).
Can you help me draft an email to Venture Partners?
Sure, here's a general template you can use:
Subject: [Your Fund's Name] Venture Partner Update
Dear [Venture Partner's Name],
I hope this message finds you well. I wanted to provide you with an update on our fund's activities and progress.
[Include updates on fundraising, investments, portfolio company news, upcoming events, or any other relevant information]
Your expertise and support are greatly appreciated as we continue to grow and make strategic investments. Please feel free to share any thoughts or feedback you may have.
Looking forward to our continued collaboration.
Remember to personalize this template to fit your specific needs and the relationship you have with your Venture Partners.
what is a VC Fund hurdle rate
A hurdle rate in a VC Fund is the internal rate of return that a fund must achieve before its general partners (managers) may receive a portion of the proceeds of the fund. However, hurdle rates are very uncommon in Venture Capital funds. They are more typically applied to larger Private Equity funds, usually in the 5% - 10% range. For VC funds, especially smaller ones, hurdle rates can create misaligned incentives and expectations with Limited Partners.
Say you have 2 offers: Offer 1: Pre-Money Value of $10 million, $5 million investment, 10% Post-Money Option Pool OR Offer 2: Pre-Money Value of $11 million, $5 million investment, 20% Post-Money Option Pool. Which is the “better” offer for the founders and can you explain why conceptually and mathematically??
The "better" offer for the founders would be Offer 1. In Offer 1, the pre-money valuation is $10 million and the post-money valuation is $15 million ($10 million pre-money + $5 million investment). The founders' equity is diluted by the investment and the option pool, but the option pool is smaller at 10%.
In Offer 2, the pre-money valuation is higher at $11 million and the post-money valuation is $16 million ($11 million pre-money + $5 million investment). However, the option pool is larger at 20%, which means more dilution for the founders.
Mathematically, in Offer 1, the founders' ownership is diluted to 66.67% after the investment and further diluted to 60% after accounting for the option pool. In Offer 2, the founders' ownership is diluted to 68.75% after the investment and further diluted to 55% after accounting for the option pool. Therefore, the founders retain more equity in Offer 1.
Why are venture funds a good investment for LPs? Please provide quantitative answers whenever possible.
Venture funds can be a good investment for Limited Partners (LPs) due to the potential for high returns. While the majority of startups in a venture fund's portfolio may fail, a few successful investments can yield significant returns. This is due to the asymmetric upside and Pareto distribution of VC fund returns, where one successful investment can be the difference between a 10x+ return on the fund and a 2x return. However, the exact return potential can vary greatly depending on the fund's strategy and the performance of its investments.
Please provide a mathematical example (and worked solution) which includes an investment in a startup done using a warrant?
Let's say a venture capital firm invests $1 million in a startup at a $10 million pre-money valuation The firm receives a warrant as part of the deal, allowing them to purchase additional shares at a set price in the future. The warrant covers 10% of the investment, or $100,000.
If the startup's valuation increases to $20 million, the firm can exercise the warrant. They pay the original price for the additional shares, which is now half of the current market value. So, they spend $100,000 to buy shares that are now worth $200,000.
The firm's total investment is now $1.1 million ($1 million initial investment + $100,000 to exercise the warrant). However, the value of their shares is $2.2 million ($2 million from the initial investment + $200,000 from the warrant). Thus, the firm has doubled their money through the use of the warrant.
what is an NAV loan?
An NAV loan is a type of loan offered by banks and nonbank lenders that is designed specifically for early-stage companies with venture capital backing.
What should the minimum commitment in a first fund be for individuals versus family offices?
The minimum commitment for individuals in a first fund should be around **$100k**. However, this can be flexible and exceptions can be made if individuals push back hard. For family offices, the minimum commitment is typically higher, but the exact amount can vary based on the fund size and the family office's investment strategy. It's important to note that family offices often care a lot about deal flow and may be interested in opportunities to double down on some of the best deals.
How is the IRR calculated?
The Internal Rate of Return (IRR) is a standard financial measurement used for investments, based on cash flows. It's calculated by finding the discount rate that makes the net present (NPV) of all cash flows (both inflow and outflow) from a particular investment equal to zero. It's important to note that measuring IRR only makes sense after investments have exited, as a single large return can significantly influence the fund's statistics.
What’s a pay to play clause?
A "pay to play" clause is a provision in a venture capital contract that requires investors to participate in future funding rounds in order to maintain their original rights or avoid penalties. If an investor chooses not to participate in a subsequent funding round, they may face consequences such as losing their pro-rata rights, having their preferred stock converted to common stock, or losing other rights and privileges. This clause is designed to encourage continued financial support from investors throughout the lifecycle of a startup.
Is there tax advantage of investing in startups as qualified small business?
Yes, there can be tax advantages to investing in startups classified as Qualified Small Businesses (QSBs) in the United States. Under the Qualified Small Business Stock (QSBS) rules, investors may be eligible for a federal tax exemption on capital gains from the sale of QSBS, up to a certain limit, provided the stock is held for a minimum of five years. However, these provisions are subject to change and it's recommended to consult with a tax advisor for the most current information.