Note: This article is the first in anongoing serieson venture fund formation and management.To learn more about managing a fund, download this free eBook today Venture Capital: A Practical Guide or purchase a hard copy desk reference at Amazon.com.
Whether traveling for business or pleasure, I enjoy visiting ancient historic sites around the world. During a recent trip, I had the occasion to visit Byblos in Lebanon. This ancient city was first settled as far back as 8800 BC, and is considered the oldest continuously inhabited city in the world. Built as the first city of the ancient Phoenicians, Byblos thrived through many millennia under the rule of the Phoenicians, Egyptians, Greeks and Romans, and was a wealthy city known for shipbuilding and trading. Entrepreneurship was alive and thriving in Byblos over five thousand years ago!
Today, Byblos is best known for its ancient ruins and it is the tourist trade that primarily supports the community. No longer a center for shipbuilding or trade on the Mediterranean Sea, the city now focuses on hosting visitors from around the world via a largely hospitality and service-based economy. So, you can imagine my surprise when I stumbled upon a sign for Neopreneur, a local co-working space that provides mentorship, workshops and meetups for entrepreneurs. What dramatic changes to our cultural landscape are we witnessing when the tourist economy in an ancient city like Byblos features a community to support entrepreneurship?
Travel to almost any part of the world these days and you are likely to run into clusters of entrepreneurship just like you will find at Neopreneur. Whether you are located in a hotbed of technology like Silicon Valley, a huge emerging market such as China, or in the ancient city of Byblos, chances are you will stumble upon a collection of entrepreneurs working to create new, vibrant companies. And, wherever you find entrepreneurs, you will find investors looking to finance those entrepreneurs.
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The majority of entrepreneurs must bootstrap their businesses to success (i.e. fund them with a combination of personal resources and revenue/credit from the business). However, a meaningful percentage of high-growth-potential startups are financed by outside capital provided by investors. Historically, much of that capital came from individual angel investors or from venture capital firms. These sources of capital were specialized in making investments in fast growing technology and life science companies because of the potential for large investment returns. And historically, most of the companies -- and their investors -- were relatively concentrated in a handful of locations in the US and other developed countries.
But much has changed over the last few decades. There’s been an explosion of entrepreneurship in many parts of the world. Major US centers like Silicon Valley, Boston and New York still hold the title for most dollars invested (and returned), but smaller cities all over the globe are becoming hotbeds of entrepreneurship with their own local sources of investment capital.
When Christopher and I began investing in early stage companies almost two decades ago, entrepreneurs trying to build high-growth investor-financed companies had a limited number of places to go for equity capital. Most assumed they would need to pitch venture capitalists, though a few knew or discovered that they could get their seed funding from angels. Today, in addition to traditional tech VCs and angel investors, there are a wide variety of capital sources for startup entrepreneurs to tap into.
New Sources of Equity Capital for Early Stage Companies
Social Impact Funds - Provide capital to companies or organizations with the purpose of generating measurable returns for social outcomes alongside financial returns.
University Funds - Provide capital to companies that were founded by members of the university community (e.g. professors, students, alumni). In some, but not all cases, the technology was developed while the founders worked at the university.
Corporate Funds - Provide capital to companies that are developing products or technologies that have a strategic fit with the corporation’s current or future plans.
Accelerator Funds - Provide mentoring, co-working space, workshops, and potentially investment capital to help accelerate the growth of very early stage companies.
Seed Funds - Provide capital to very early stage companies. The funds are frequently started by active angel investors as a way to invest more capital into more companies than the investor would be able to do with their own capital.
Country/State/Regional Funds - Provide capital using government funds as an investment into companies that will benefit the local economy through ways such as job creation.
This series of articlesis written for fund managers who are creating these new sources of entrepreneur-focused capital today, and those who aspire to start funds in the near future. As active early stage investors, Christopher and I understand many of the challenges faced by fund managers no matter what type of fund they are running. In addition to our personal angel investing, we are experienced managers of several seed funds. And, over the years we worked with fund managers and syndicated dozens of deals with each of the other types of funds listed above.
Experience has taught us there is more to running a successful venture fund than finding companies and hoping for big exits. In this series of articles,we will discuss:
7 Critical Questions That All Venture Fund Managers Need To Consider
What are the key factors to consider in defining your fund’s investment strategy?
How do you go about raising capital for your fund?
What are some of the biggest challenges faced by a fund manager?
How do you structure a fund from both a legal and accounting standpoint?
What types of skills do you need on your fund’s management team?
What are the economics behind running a fund?
How should a fund manager report fund activity and results to the fund stakeholders (i.e. investors or Limited Partners)?
Running an early stage venture fund can be interesting and rewarding work. But setting up and managing an investment fund takes significant time and effort. Given the relatively long life cycle of a startup company investment -- typically 10+ years before a successful investor outcome -- fund managers must be willing to commit their time and effort for at least a decade. Not everyone is willing to commit at that level. Whether you are thinking about setting up a new fund or already managing an active fund, make sure you know what the best practices are in fund management. This series of articleswill help you grasp the magnitude of the effort and determine whether you have what it takes to be successful.
Want to learn more about managing a fund?Download this free eBook today Venture Capital: A Practical Guide or purchase a hard copy desk reference at Amazon.com.
As an enthusiast deeply involved in the venture capital landscape, I have been actively engaged in early-stage investing for nearly two decades. My experience includes not only personal angel investing but also managing several seed funds. Over the years, I have collaborated with fund managers and participated in numerous deals across various types of funds. This hands-on involvement has equipped me with a profound understanding of the challenges and dynamics within the venture fund ecosystem.
Now, let's delve into the concepts presented in the article on venture fund formation and management:
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Historical Perspective: The article highlights the historical context of venture capital, emphasizing the traditional sources of outside capital—individual angel investors and venture capital firms. It points out that these sources were primarily concentrated in a few locations, such as Silicon Valley, Boston, and New York.
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Changing Landscape: The landscape has evolved significantly over the last few decades, witnessing a global explosion of entrepreneurship. While major U.S. centers still dominate in terms of investment, smaller cities worldwide are becoming hotbeds of entrepreneurship, fostering their local sources of investment capital.
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Diversification of Capital Sources: The article underscores the diversification of capital sources available to startup entrepreneurs beyond traditional venture capitalists and angel investors. It introduces several new sources, including Social Impact Funds, University Funds, Corporate Funds, Accelerator Funds, Seed Funds, and Country/State/Regional Funds.
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Series of Articles: The series of articles target fund managers involved in creating these new sources of entrepreneur-focused capital. The authors, Christopher and the enthusiast writing this response, emphasize their understanding of the challenges faced by fund managers, drawing from personal angel investing and managing seed funds.
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Key Questions for Venture Fund Managers: The article outlines seven critical questions that venture fund managers need to consider. These questions encompass various aspects, from defining the fund's investment strategy to structuring the fund legally and accounting-wise.
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Fund Management Challenges: The authors acknowledge that running an early-stage venture fund can be rewarding but also demanding. They discuss the challenges faced by fund managers, emphasizing the significant time and effort required, given the long life cycle of startup investments.
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Best Practices in Fund Management: The series of articles aims to guide readers on best practices in fund management, providing insights into the effort required and helping individuals determine whether they possess the qualities necessary for success in this field.
In conclusion, the venture capital landscape has witnessed transformative changes, and this series of articles serves as a valuable resource for fund managers, offering practical guidance and addressing crucial aspects of venture fund formation and management.
