Things to think about when investing in a Venture Fund.
1. You must be an accredited investor. Meeting one of the accredited investor definitions
(i.e., US$200K in income or US$300K joint income with spouse for the past two years, or US$1M net worth)
2. Meet Capital Call requirements. If you commit to $250k on a 5 year investment period, that means you have to write a check for $50k per year. Sometimes its common that the fund may require first 2 years upfront.
3. Asset Allocation of the Super Rich , according to this about 12% (VC+PE) (*disclaimer, I am not in the wealth management business). So, if you did say 5% of $1M net worth (See above), then that would be $50K. The problem here is that most VC minimums are much larger. Starting small is always a good idea.
4. Past Performance is not an indication of future performance…remember the Dot Bomb? You are investing in a model with a Team that is incentivized to make you successful. Well, except for Management Fees, I don’t like Management Fees, but I understand that VCs have mortgages too.
5. Consider it a learning experience, but don’t expect to be taught. You are a Limited Partner, see definition if limited. If you have a little more cash, sometimes you can become a “Special Limited Partner”, and get a front row seat.
6. Invest in the thesis first, then in the team. The team looks something like the Avengers (click the link, you won’t regret it). Deal Generator, Bean Counter, Deal Manager and Operator. (Or Similar team).
7. Angel Investing is like stock picking, Venture Funds are like mutual funds (a portfolio). A lot of times they feel the same, but they aren’t. Early stage investing is a hands-on business. It takes experience and some of the better entrepreneurs are gun-shy of angels.
8. Successful Venture Funds rarely focus on narrow geographies. Did you know that they grow pretty good peaches in Texas, not just in Georgia?
9. 20% IRR is considered good, however while Venture Funds are generally uncorrelated, the companies they invest in are affected by the broader economy. Realized Returns (Cash in the bank) vs. Unrealized Returns (The round after our investment was higher, but no cash in the bank).
10. The best for last. It’s about “deal flow”. How do they tangibly get access to great deal flow? Maybe a partner is “well known” and deal flow follows them. Maybe they have exclusive access to deals from an incubator? Maybe they have a relationship with a larger fund that gives them allocation into their deals?