Implications Of How A VC Is Funded: Diverse Limited Partners

Editor's note: NYC Venture Capitalist Mark Davis is authoring a four-part series on how a VC is funded. Davis notes the four methods are: diverse limited partners, family office, government or public capital. Today, Davis looks at diverse limited partners. The other three methods will follow throughout the week.

In my post, How A VC Is Funded, I listed four way in which VCs obtain capital to invest in startups. Each of these four sources of capital has slightly different implications for entrepreneurs.

Fundraising Cycles

Investments made in a VC fund by a diverse group of limited partners are integrated in closed end funds. As a result, VCs who raise money from a diverse group of LPs have to go and raise capital from limited partners every 3-5 years. Money is raised, the fund is closed, the capital is invested and then another fund is raised.

As a result, entrepreneurs can be affected by where the current fund is in its lifecycle. If you receive an investment from a VC when they are raising another fund, the VC will likely be slightly busier than they would otherwise be. Fundraising is a very time consuming process for VCs, making them very busy. This doesn’t mean that they won’t have time for you, it just means that their schedules will be more complex and they will be slightly harder to reach.

However, this does not mean that they will not be able to make follow-on investments in your company. Good VCs keep capital reserves to support their portfolio companies even after they raise their next fund. Be sure to ask them about their reserve policy to ensure that they will be able to continue to support you.

Limited Partner Network

Another consideration created by this funding structure is that these VCs often have a deeper network of people vested in your company’s success. High net worth individuals who invested in the fund will care about the success of your company. If a VC has an investor (limited partner) that could help your company they will typically contact them.

Risk Of Exiting The Business

If you raise money for a poorly performing VC fund, it is possible that they may not be able to raise a subsequent fund. As a result, in extreme circumstances they may be forced to find new jobs before you have sold your company.

This column was provided by Mark Davis, the author of Get Venture, a column designed to help entrepreneurs raise venture capital. In addition to his column, Mark is active in the venture community as an entrepreneur, advisor and venture capitalist. He currently works at DFJ Gotham Ventures, a leading early-stage IT venture capital fund based in NYC. Mark is pursuing his MBA at Columbia Business School.