Alex Pattis’ Post

Venture Capital: An Alternative Asset Class Venture capital (VC) is a high-risk, high-reward asset class that fuels innovation by investing in early-stage companies with massive growth potential. Here’s a quick look at VC fundamentals: 1. High Risk, High Reward: VCs target disruptive startups addressing large markets, seeking outsized returns. Investments are typically aimed at high-growth sectors with potential for 10x-100x returns. 2. Investment Timeline: VC funds usually operate on a 10-year timeline. In the first five years, funds are deployed to invest in promising startups; the latter years focus on follow-on investments and guiding companies to exit. 3. Stages of Investment: From Seed to Series C, each round has its unique risk profile and reward potential. Seed investments have the highest risk but can yield up to 644% ROI at exit. Later rounds, like Series C, offer more stability but typically yield lower returns. 4. Exit Strategy: VCs aim for major liquidity events, such as an IPO or acquisition, where returns are generated. The goal is a minimum 3x return, with top-performing investments achieving 10x or higher. 5. The Role of GPs and LPs: Limited Partners (LPs) supply capital, while General Partners (GPs) manage the fund, identify investment opportunities, and support companies on the path to exit. PS. check out 🔔 for a winning pitch deck the template created by Silicon Valley legend, Peter Thiel https://lnkd.in/ejp-Bhnu

If venture capital were a car, then it'd be a 4-cylinder Honda Civic - slower, but fuel efficient. It is no new news that VC deal activity in the US has slowed from pandemic highs. According to PitchBook’s data, deal counts and capital invested steadily fell each year with 2024 YTD deal counts and capital invested figures at 44.1% and 41.8% of 2021 totals, respectively. This sluggishness is accompanied by a lackluster exits environment and trickling returns back to LPs. However, where institutional VC fundraising and deal making has fallen short, corporate venture capital (CVCs), which constitute over a third of US VC deal making, offer a unique value proposition where startups can close a deal by "arbitrage" of differing investment incentives between institutional VCs and CVCs. According to Strebulaev and Wang's working paper, there are a few key differences between institutional VCs and CVCs: 1. VCs tend to be more directly involved in a company's operations via a board seat, which afford them voting rights and a fiduciary duty to the company. CVCs may walk a tighter rope balancing fiduciary duty and parent company interests if provided a board seat. However, CVCs can be a worthwhile addition to the cap table for a potential commercial relationship and access to the parent company's resources. 2. CVC deal vetting processes are slow, and capital availability is contingent on the parent's budget approvals. An investment committee must vet the deal first before capital can be deployed. The agility institutional VCs have is certainly enviable, but once a deal is approved, CVCs are in for the long haul since follow-on investments are a norm as long as the parent's strategic direction does not make a 180 pivot. 3. Most interestingly, CVCs rarely invest for financial gains and prioritize the strategic value of an investment. This is as hard to quantify as it sounds. In fact, CVCs don't measure their investment performance in terms of IRRs but rather with ROI and cash-on-cash. VCs are almost entirely returns-driven and rightly so given the higher stakes and responsibilities of taking other people's cash. Understanding these differences enables startups to find compatible investors whose incentives match their needs. In a venture downturn, VCs are under more LP scrutiny and pressure to deliver liquidity and returns, but CVCs are not the same. CVCs are beholden to parent company strategic directives and are funded solely off of the parent's balance sheet. This is particularly advantageous for companies with product/services that compliment a parent company's core technology as one of the findings of the paper is that US CVCs prefer to invest in "adjacent technologies" - tech that does not directly compete with but compliments the parent's core tech. For more insights on US CVC structures and governance, I highly recommend reading the working paper:

As a GP in climate venture capital, I often meet high-net-worth individuals or family offices new to VC, wondering if they should invest as LPs. While LPs choose which VC funds to partner with, GPs also select which LPs to admit. VC is not a typical financial product—it's a relationship. LPs and GPs will work together in the same fund for the typical 10-year fund life. It's crucial for LPs to understand the firm's strategy before becoming fund LPs and be good partners with the other limited partners, potentially supporting the fund's best outcomes. Common Questions from New LPs 1. Can I take my money back in the middle of the fund? Typically, no. VC investments are long-term, and GPs expect LPs to stay for the full time horizon. Startups need time to mature and exit, requiring patience. However, you can trade your LP shares in the secondary market, though this may involve negotiation and a valuation cut. 2. Can I force the GP to invest or not invest in a startup? No. LPs cannot and should not influence GP investment decisions. GPs have a portfolio strategy and make decisions for specific reasons. Trust the GPs' expertise. If their financial returns align with the fund's goals, join the next fund. If not, look into the reasons but don't interfere. 3. Is VC more risky than growth capital? Many believe early-stage investments are riskier than later-stage ones, but VCs typically return 3x with longer time frame, whereas growth funds return 2x with shorter time frame. Growth investments need careful valuation. The 2022 SPAC wave's stock price drop did not end too well for many growth investors. 4. Does having brand-name co-investors demonstrate a good GP? No. Each fund or investor has its own strategy. Strategic investors might invest for synergies, not just financial returns. Focus on understanding GPs' rationale rather than buzzwords. 5. Should LPs have irrelevant requirements on how GPs should run a fund? LPs need to know the asset class and sectors they are investing in. If unfamiliar, GPs can provide background information. Imposing irrelevant requirements can hinder operations and make GPs reconsider the partnership. GPs prefer constructive input and have limits on the number of LPs and the size of checks accepted. By understanding these points, new LPs can better navigate the venture capital landscape and form productive partnerships with GPs. Fellow GPs, other points to add?

Business model of a Venture Capital fund :  How is a VC structured and how does it make money? Stakeholders involved: - Limited Partners - General Partners (and the VC fund team) - Portfolio of startups STRUCTURE OF A VC FUND 𝐋𝐢𝐦𝐢𝐭𝐞𝐝 𝐏𝐚𝐫𝐭𝐧𝐞𝐫𝐬 (𝐋𝐏𝐬): - These are the investors in the VC fund / VCs raise funds from these entities - They can be high net worth individuals (HNIs), financial institutions, or funds of funds (FOFs) etc. - LPs provide the capital that the VC fund uses to invest in startups. 𝐅𝐮𝐧𝐝 𝐒𝐢𝐳𝐞: This is the total amount of capital that the VC fund has raised from LPs. 𝐆𝐞𝐧𝐞𝐫𝐚𝐥 𝐏𝐚𝐫𝐭𝐧𝐞𝐫𝐬 (𝐆𝐏𝐬) (and the VC fund team): - These are the managers of the VC fund. - They are responsible for sourcing and evaluating potential investments, making investment decisions, and managing the portfolio companies. 𝐌𝐚𝐧𝐚𝐠𝐞𝐦𝐞𝐧𝐭 𝐅𝐞𝐞𝐬: - This is a fee that the GPs charge the VC fund for managing the quantum of funds raised. - The fee is typically a percentage of the fund's committed capital (the total amount of capital that LPs have agreed to invest). - The management fee is in the range of 1.5% to 2% of the fund size. 𝐂𝐚𝐫𝐫𝐲: - This is a performance fee that the GPs earn if the VC fund generates a return on its investments. - The carry is typically a percentage of the profits that the fund generates after LPs have been paid back their investment. - The carry is in the range of 20% to 30% of the profits. 𝐏𝐨𝐫𝐭𝐟𝐨𝐥𝐢𝐨: This is the collection of companies that the VC fund has invested in. ________________________________________ VC FUND LIFE : - VC funds typically have a closed-end structure, which means that they have a fixed period during which they raise capital from LPs. Once the period is closed, the VC fund cannot raise any additional capital. - VC funds typically have a 8-10-year lifespan. During this time, the VC fund will raise, start investing in startups, and then look to sell its investments to other investors or strategic buyer or through an initial public offering (IPO). - The returns of a VC fund can be very high, but they can also be very low. Inherently a very risky asset class = quantum of profits is uncertain = carry is uncertain.

🌟💰 Cendana & Kline Hill Launch $105M Fund for Secondary Stakes in Seed VC Funds💰🌟 📢Cendana Capital, a fund of funds that invests in dozens of seed-stage venture firms, and Kline Hill Partners, a firm focused on buying small previously owned private assets, are announcing a new $105 million Kline Hill Cendana Partners fund, which is well above the $75 million target, reported TechCrunch. 🔊“Over the past 2 years, we’ve been hearing from our portfolio funds, ‘We have a family office that wants to sell their $2 million commitment. Would you be interested in buying it?'” said Michael Kim, founder and managing director of Cendana Capital. "As we navigate the evolving VC landscape, this fund offers a unique opportunity to buy stakes in seed-stage VC funds and startups at relative bargains," shares Michael Kim. 💡💸 Led by Kim and Chris Bull, CFA of Kline Hill Partners, this joint venture combines expertise and relationships to navigate the secondary market with precision. "Our goal is to capitalize on the current buyer's market in venture capital," says Bull. 🌐🤝 "With traditional secondary investors eyeing the venture space, the competition is fierce. However, our focus on seed-stage firms sets us apart," explains Kim. 📈💼 Cendana’s relationships with its portfolio funds, including Lerer Hippeau, Forerunner Ventures and Bowery Capital, are helping it take the lead on sourcing secondary deals. Cash-hungry venture investors, whether VCs themselves or their LPs, are increasingly looking to sell their illiquid positions to secondary buyers.  As they embark on this venture, the firms are poised to make a significant impact on the VC ecosystem, providing much-needed liquidity and unlocking new opportunities for growth. "The future looks bright for Cendana and Kline Hill's joint endeavor," concludes Bull. 🌟💰 With the demand for liquidity in the VC space at an all-time high, Cendana and Kline Hill's initiative couldn't come at a better time. By facilitating secondary transactions in seed-stage funds, they're not only providing relief to cash-hungry investors but also fueling innovation and growth in the startup ecosystem. 🌱💡 As the venture capital landscape continues to evolve, partnerships like these will play a crucial role in ensuring the health and sustainability of the industry. With their proven track record and strategic approach, Cendana and Kline Hill are well-positioned to lead the way forward. 🚀🌐 ✅ Looking to raise capital for your #fund and increase the international pool of your LP #investors?   🤝 Need warm #LP introductions?   📝 Selling #secondaries to increase liquidity?   🧐 Looking for co-investments?   ▶ G+QUANT's link for inquiries and fund decks: https://lnkd.in/gjC_EuTE #VentureCapital #SecondaryMarket #SeedFunding #Innovation #StartupInvesting #Entrepreneurship #CendanaCapital #KlineHillPartners #VCInvestment #SeedStage #LiquidityOpportunity #FutureofVC #InnovativePartnerships

"Unlike real estate agencies, venture capital firms make money regardless of their results. Over the life of a ten-year fund, the VC firm collects a total of around 15% of the fund’s size in management fees, at a rate of 2% a year during the first five years and 1% afterward. From a typical $100-million fund, for example, the VC firm collects $15 million in management fees." https://lnkd.in/gdZGqbnv Superb, insightful post by AI expert and author Emmanuel Maggiori on the questionable character of much of what's going on in the contemporary venture capital and startup scene. This Charlie Munger quote alone makes it worth a read: "Back in 2000, venture-capital funds raised $100 billion and put it into Internet startups — $100 billion! They would have been better off taking at least $50 billion of it, putting it into bushel baskets and lighting it on fire with an acetylene torch. That’s the kind of madness you get with fee-driven investment management. ***Everyone wants to be an investment manager, raise the maximum amount of money, trade like mad with one another, and then just scrape the fees off the top***." (emphasis mine) See https://lnkd.in/gMAnjbYZ for more excellent observations on the interesting times we are living through at the moment.

Yet another excellent example for misaligned incentives (alias cobra effect). There are exceptions out there doing great work, without doubt. But at the system level the whole game is not only detrimental for LPs (fund investors): Moreover it is highly non-ergodic for #founders who are facing outsized risks of failure due to these dynamics. Often unnecessarily so: unless your business model really yields exponential growth (stop bullshitting yourself!) you're probably better off with other capital sources. Keep that in mind when raising for a venture.

Inside Venture Capital Firms: Venture capital (VC) funding isn’t just about the money—it’s a structured system designed to support high-growth startups while managing risk. Here’s a peek behind the scenes: 1. Fund Structure: VC funds operate as limited partnerships with General Partners (GPs) managing investments on behalf of Limited Partners (LPs). GPs have fiduciary responsibilities to act in LPs’ best interests. 2. Investment Horizon: VC funds typically have an 8-10 year lifespan, with investments made in early years and exits targeted as companies mature. 3. Fee Structure: VCs earn through management fees (around 2% of assets) and carried interest (around 20% of profits). This aligns the interests of GPs and LPs. 4. High-Risk, High-Return: VC is a high-risk asset class driven by the “power law,” where a few big wins cover losses on other investments. GPs target startups with high growth potential and exit multiples to achieve the fund’s desired returns. 5. LP Contributions: Institutional LPs bring more than capital—they offer industry expertise, networks, and advisory support, enhancing the VC’s portfolio companies. PS. check out 🔔 for a winning pitch deck the template created by Silicon Valley legend, Peter Thiel https://lnkd.in/ejp-Bhnu

Introduction To Venture Capital: Are you curious about how venture capital works and what it takes to secure funding for your startup? Here’s an overview based on “Introduction to Venture Capital” by Avidan Rudansky. This guide breaks down the essentials of VC funding to help entrepreneurs navigate the fundraising journey. Key Takeaways: 1) What is Venture Capital? Venture Capital (VC) is a form of private equity where funds make long-term equity investments in startups. It involves high risk but offers the potential for substantial returns over 5-10 years. 2) VC Structure and Roles: From General Partners to Analysts, VC firms have a hierarchy of roles, each contributing to the deal flow and investment decisions. Key players like General Partners oversee the investment process and provide strategic guidance to portfolio companies. 3) The Economics of Venture Capital: The “2 and 20” model explains VC compensation, where firms charge a 2% management fee on assets and earn 20% of the profits after clearing a hurdle rate for investors. 4) Investment Stages: VC investments are categorized into various stages, from Seed to Late Stage, each with a different focus—from validating an idea to scaling and preparing for an IPO or acquisition. 5) What VCs Look For: The focus is on the 3 M’s—Management, Market, and Model. VCs prioritize strong teams, large markets, and innovative business models. They expect a clear path to a 10x return on their investment. ----- Follow All Chance Hub to learn from more innovative insights

Venture Capital Venture capital has helped fund some of the most industry-disruptive companies of our time, from Airbnb to Google. But those brands weren’t exactly household names when they received their initial VC cash infusions.   By definition, venture capital is a form of investment. Firms use VC to invest in startups and other emerging organizations with high growth potential. In other words, VC firms bet on companies with hopes that they’ll grow into larger corporate powerhouses (more VC basics here).    The lifecycle of VC looks something like this:   Accredited investors, including wealthy individuals, endowments, and pension funds, invest money into a VC firm (or “fund”). The firm then hunts for potential companies that they believe will grow significantly and proceeds to invest some of the aforementioned funding into them. VC firms often give their portfolio companies guidance and strategy assistance in addition to funding.   The manager of the VC firm is called the general partner, or GP, whereas the people investing their money in the firm are limited partners, or LPs.    In exchange for the funding—which these startups often use to scale part of their business, whether that’s entering a retailer for the first time or launching a new product category—the VC firm receives ownership in the business (called “equity”).    The LPs pay the firm’s management fees, which are annually around 2% of the total fund (so for a $100M fund, the management fee would be $2M). When a portfolio company gets acquired, the GPs typically get roughly 20% of the profit—called carried interest or “carry” for short—that the VC fund made (learn more about carry).   These investments are considered highly risky. Roughly 75% of VC-backed companies will fail. That means the other portfolio companies need to provide significant returns to make up for all the companies that don’t yield returns (more details on how these numbers work here). VC firms make multiple investments in different businesses in the fund in hopes that a handful of them are big enough successes to make up for the other low performers.   The venture capital industry is relatively new (unless you count the 19th-century whaling industry, which one Harvard professor argues was the basis for the modern VC model—more on that here).    The first modern VC firm, the American Research and Development Corporation or ARDC, was founded in 1946. It’s best known for investing in companies that utilized technology developed during World War II. The ARDC’s cofounders included Federal Reserve Bank of Boston president Ralph Flanders and Harvard Business School professor Georges Doriot.   Before the ARDC, wealthy families such as the Rockefellers were the economy’s primary “risk investors.” But this new firm proved that larger institutions (such as universities and insurance companies) were willing to take financial risks for the potential of significant rewards, too.