Implications Of How A VC Is Funded: Public Markets

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 markets. Today, Davis looks at the public markets.

In my post, How A VC Is Funded, I listed four ways that VCs obtain capital to invest in startups. Each of these four sources of capital has slightly different implications for entrepreneurs. In this post, I will discuss the implications of a public funded VC.

Capital Constraints
Similar to family office funded VCs public funded VCs raised a relatively fixed pool of capital from the public markets, which they continue to recycle from exits to new investments. Entrepreneurs should be sure to ask any fund that relies on recycled capital for future investments about their reserves to ensure that capital will be available in the future. While in theory the fund can always tap the public markets, that may not be the reality.

The Public Eye
Public companies have to make public disclosures. As a result, more about your company and its operations may be easily accessible to third-parties if you have a public investor. If your company requires substantial privacy because your strategy relies on being the first mover or otherwise then you should ask these VCs about the disclosures that they will make.

Bureaucracy
Too many entrepreneurs bureaucracy is the anti-Christ. If this is the case beware of the additional administrative burdens that might be required if you accept money from a public fund.

These funds are regulated by the SEC and have substantial reporting requirements. Be prepared to answer questions and provide lots of data as necessary.

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.