Venture Capitalist Have Bosses? Yes, They Do and You Will Be Shocked Who They Answer To
Unless you are independently wealthy or homeless, you have to answer to someone, a boss, venture capitalist, the board, customers, and/or the bank. If you are an entrepreneur and are making the rounds on Sand Hill Road, it is hard not to spot the high-end BMWs and Mercedes, as well as more exotic vehicles, parked throughout the garages. Walking through the smartly decorated Sand Hill offices can be a shock for new entrepreneurs, which are likely in or just out of the dorm room. It can look like venture capitalists are “Kings of the World”. But, never fear Venture Capitalists have bosses too. And, their bosses are typically much more demanding than any boss you will ever have.
Where do venture capitalists get their money? Primarily, they get it from you. Shocking, isn’t it. Sources of capital are the following: 42% private and public pension funds, 25% finance and insurance, 21% endowments and foundations, 10% individuals, and 2% from corporations operating funds (not pensions – Corporate Venture Capital or Strategic Investment Capital) (source Venture Impact 4th edition – prepared by Thomson Financials using 2003 data).
The large institutional investors are the managers that handle your pension investments. They utilize multiple vehicles with different risk and return profiles for portfolio diversity. Most of your money goes into low risk vehicle for income preservation. However, a small percentage is invested in high risk vehicles, i.e. venture capital, emerging markets, etc. You never thought your grandfather was instrumental in providing seed capital to found Google, Intel, and others, did you. Finance and Insurance companies obtain money from individual investor also. Whether investing in stock market funds, mutual funds, life insurance policies, etc., these companies have capital to deploy and need to earn a return on for you. Again, a small part of the overall portfolio goes into venture capital. Endowments and Foundations are permanent funds that are bestowed upon an individual or institution. Examples are The John D. and Catherine T. MacArthur foundation and Harvard, Columbia, and Stanford’s Alumni endowments. These organizations grow capital to meet their mission objectives, which may be social ideologies or operationally focused, i.e. grow capital to grow a University. A small part of their capital goes into venture capital each year. Another source of liquidity is Individuals and Families which contribute to venture capital funds. These are typically wealthy individuals that invest directly into a venture fund. However, this is a little misleading since an each fund’s Limited Partnership agreement stipulates that the fund managers (venture capitalists) must invest 1% or more of the total capital raised and this is included in the Individuals and Families number. This means when venture capitalists invest in your startup they are investing their own money in you and your grand idea. Does this explain all the phone calls you get from them? Corporate Operating Funds are corporate venture capital funds. The best know corporate venture capitalist is Intel Capital. These funds usually are setup to keep the corporation’s abreast of emerging technologies and to invest in strategic directions.
Venture Capitalist subscribe to a larger ideology. It is not about a single startup. The dream is to create a vibrant economic model where entrepreneurs can obtain capital, grow a business and achieve a positive liquidity event. Liquidity events give growth capital to the business, delivers returns to investors and entrepreneurs and fuels the next cycle of entrepreneurial investments. Without positive returns, the venture model dries up, startup funding stalls and the capital flows into other financial vehicles.
In this structure, venture capitalists answer to the above mentioned investors on their fund performance. Just like startups have board meeting with their investors, venture capitalists have meetings with their investors who review their investments and portfolio status. The venture capitalists’ investors (institutional managers) in turn report on their investing activities to their investors (you); you always wondered about those little prospectuses you got in the mail from Fidelity, Morgan Stanley, Vanguard, etc. Actually read one some time. If returns are good, everyone is happy. If not, the institutional managers pull back on investment in high risk vehicles. Venture capital, subsequently, reduces investment in startups.
In a unique turn of events, the guys that look over the shoulder of the venture capitalists are the pension, 401k, and mutual fund investment managers, which are the guys that manage your money; therefore, venture capitalists really work for us all. It is a hard gig because I know my father is intractable with a couple hundred dollars. I cannot imagine his response to an entrepreneur’s request for couple million. Venture Capitalist provides a valuable service to both, the investment market and entrepreneurs. Venture Capital is a challenging job; but, they do have a boss, just like everyone else. To be successful, entrepreneurs need to remember that fact in order to respond to the venture capitalists needs and understand the pressures that they face.
Author: JD Morris
Article Source: EzineArticles.com
Provided by: Programmable Multi-cooker
