In 2000, before the dot-com blow-up, I was invited to individually invest in a VC fund where a co-investor worked. It is a “name brand” firm that to this day enjoys a loyal following among investors.
This year, I just learned that my investment has just broken even. So, yes, after 18 years, I have received back my principal. The fund continues to have some portfolio companies, and so, it will take about 20 years until the fund ends.
Few other business commitments consistently last as long as a VC fund.
Much has happened over the past two decades: multiple presidencies, multiple wars, quite a few macro-economic cycles, the advent of broadband and smartphones, etc.
Much has happened in my personal life the past two decades. For example, in 2000, some of my children were not even born!
The 2000 fund I mentioned is not an anomaly. For the industry as a whole, the average VC fund lasts a long time, per a 2006 study. (N.B.: Most firms stop charging management fees after Year 10 of the fund’s inception.) Since then, Eric and I think the holding periods have lengthened even more, particularly for early-stage funds.
VC is a very quirky industry. It takes a long time before the reports cards fully come in, and an investor with a “hot hand” in one fund may not have one in the next. And, if a firm does not have a collegial culture, and as hot hands shift, it can make for an unstable dynamic.
It also makes for a very difficult job for LPs; for example, the partner group they are backing in Year 1 of a fund will not be the group that finishes out that fund. I guarantee that there will be turnover at a firm over 15 years. It is a moving target. Very, very few firms are able to create a healthy and peaceful inter-generational hand-off.
Add to that, some of a firm’s funds may be duds, but you hope as a LP that in a series of funds, one will absolutely crush it. But, it is hard to “time” these cycles as a LP; if you drop a VC fund, they won’t let you back in the next time around unless fundraising is difficult.
I’ve always believed that early-stage VC is a calling. You really have to be committed to do it, well beyond the desire to make money. That’s because it is a slow way to make money.
You also, IMO, really have to like and trust your partners. When you raise a series of funds together, you’re together for a long, long time. You spend more time with each other than with your families. Thankfully, I love spending time with Eric and Ed.
Finally, if you raise a new fund, you really have to know that you individually will be committing to give your best to your investors and entrepreneurs for 15+ years. That is a long time horizon.
Raising money from others makes for a huge responsibility. It is a particularly significant one in VC. It is a quintessential Trust Game, as I’ve written before (blog series here), that requires trust within a firm, between the VC and the entrepreneur, and between the VC and the LPs.
When the VC ecosystem works, it is absolutely magical: many jobs are created, new industries are spawned, and riches are made. It is a privilege to be involved with a company and witness (and, try to help with) its path to greatness. But, trust and much patience are required for all that to happen.
4 thoughts on “The Long Road of Venture Capital Funds”
Thanks for sharing this, Jo. If someone gets their information by reading the press, they would think that VC is a get-rich-quick arrangement. Also, the press goes on about the high fee stream without understanding that many GPs pay a good percentage of income back into the funds as capital commitments, and also about the favorable tax treatment of carried interest, without understanding how GPs often get substantial deemed capital gains taxes without getting distributions (due to reinvestment to cover fees and the 110% investment cap, for example). I’m in funds where I’ve paid all my cash distributions to the IRS to cover taxes on gains that got reinvested in the fund and not distributed to me. Complicated stuff but maybe food for more blog posts…
Eric, those are great points!
Wonderful piece. Another thing that most people outside of this industry don’t know is that this job is super labor-intensive. There’s almost no slacking possible. I’m always worried about some new startups somewhere on this planet starting a revolution that I’m not aware of. The constant anxiety drives me everyday but it’s definitely not for most people. Couple that with the fact that the partnerships last much longer (if they do last) than most marriages, then it’s only possible that it’s a job of calling, not of financial return or fame.
Great points, Jerry!