Limited Partner or Fund of Funds?
accessible directly. Further complicating the process is the venture industry’s notorious lack of transparency relative to their fund’s actual value. A venture fund series financing in one invested company may report a value considerably different than the same series investment in that same company by another venture firm.
research and continually spin-off new patents, along with a steady flow of budding intellectual entrepreneurially-driven graduates. 80% of venture capital and Angel investors operate here, and, where else will patent attorneys, new business formation attorneys, equity attorneys give you their time without payment in advance of receiving venture capital funding? Although the capital markets have been sluggish of late, investment bankers eagerly swarm Silicon Valley in order to underwrite venture backed IPO candidates. In no other locale will you find the combination of all these factors.
In such a fast paced environment, with over 3,500 venture capital funds competing for the most promising start-ups, FoFs are a very efficient way to construct a balanced portfolio for investors seeking to participate in this market segment through the very best venture funds. Essentially, FoFs can offer an investor access to the very best performing Venture Capital fund Managers not otherwise
Generally, a FoFs has greater leverage in scrutinizing a venture firm’s financial reporting, its partner expertise relative to market sector focus resulting in a better risk-return ratio than direct investments. They’re also looking for more than the conventional venture model has traditionally delivered – multiples of cash back rather than straight Internal Rate of Return (IRR). They seek a safer, more diversified investment base from which to drive reasonable returns, across shorter investment cycles, versus today’s typical 10-12 years. The reasons for the impressive growth of FoFs is that they provide diversity among Venture Fund managers, reduce risk and hold out the promise of net returns higher than the average venture capital return rates. Investors are more willing to invest in FoFs for the benefits provided by this pooled investment structure, continual due diligence and on-going oversight compared to investing in a single strategy venture fund. The most common FoFs fee structure is a management fee of 1% and an incentive fee of 10% above that of the underlying Venture Capital fee structure. The additional fee layer is relatively small with returns generally more than offsetting the added expense. A balanced, properly allocated venture capital/private equity portfolio generally tends to provide higher returns with less inherent risk.
An industry focused FoFs is well experienced in assessing the most promising Venture Capitalists, both the Emerging Venture Fund Managers as well as the historical brand name Venture Capitalists. The brand name Venture firms provide a low-risk foundation for consistent top-quartile performance albeit with higher fees to their LPs. Emerging Fund Managers focused on rapidly growing market
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