Beyond Financial Return: Value Added for Investors
“Perfect partners don’t exist. Perfect conditions exist for a limited time in which partnerships express themselves best”. Wayne Rooney
Just as entrepreneurs raise capital from investors by offering economic and intangible benefits in return, VC fund managers also raise capital from Limited Partners (LPs) granting benefits of different kinds. Not all LPs are the same, each one has different objectives and seeks complementary benefits. For example, it is not the same to have participation from CalPers, from GIC (one of the two sovereign wealth funds in Singapore), from a family office or from a corporation. Each of their motivations for investing in VC are different.
When a fund manager is raising capital, he must consider different factors before going to the roadshow, among these factors are the rights that will add value to potential LPs.
- Economic or investment rights
The LPs, in addition to receiving a return on their investment, hope to be able to maximize this economic-financial opportunity in different circumstances. For example, an institutional pension fund will be looking to diversify its investment portfolio in several funds, for which it could look not for a maximum ticket, but a minimum ticket in each of the funds. You would also expect to receive, in return of your participation, access to portfolio reports, an annual meeting with investors, and a potential seat on the investment or advisory committee.
In the case of a family office, you may be looking for additional investment opportunities. These could be through co-investment opportunities with the fund by having access to the GP deal flow where it could invest independently.
If a corporate act as LP in a fund, it could also seek participation of the GP in the investment committees of the CVC, so that the knowledge of the GP has some positive economic impact on the decision-making.
2. Networking rights
Today more than ever the construction of business networks is essential. Any relatively sophisticated investor will have this consideration as one of the investment factors.
Family offices are sophisticated investors who seek to generate value through the construction of networks. For this reason, it is common for them to request access to startups or founders of the investment portfolio of the fund manager and reports on their performance. In the same way, they would see with great interest their participation in fund events where they could meet corporations and leaders of the entrepreneurial and VC ecosystem. In addition, in order to expand their network, they would seek access to other investors and fund allies with whom they could collaborate or at least exchange points of view.
If the investor is a CVC, it would also seek the connection with portfolio entrepreneurs with whom he could carry out some proof of concept, pilots or even reach a commercial agreement.
3. Knowledge and learning rights
LPs are also looking for knowledge and learning opportunities. Therefore, a strategy of the GP is to offer these rights to its investors. Over time, the GP stores information in databases that can be shared with third parties. Additionally, you may share this information through reports, videos, technology, entrepreneurship, or industry themed sessions, or even build a digital library. Fund managers sometimes hold seminars, executive programs, or forums adding value to investors. Sometimes the fund team carries out consulting and advisory work supporting the LP on a specific project.
To have access to these rights, it is not necessary to invest in a VC fund, you could also acquire them through an accelerator or consultancy that works with investors. For example, there are accelerators that aim to discover entrepreneurs and support the growth of their startups. In doing so they create an infrastructure that they put at the service of investors so that they can benefit each other.
Accelerators such as MassChallenge, 500 Startups, Plug and Play, among others, offer the investment right for investors to invest in their funds or directly in companies in their portfolio. They also offer the right to network for investors to meet entrepreneurs and players in the ecosystem through the events they organize. In addition, through their events they share sectorial knowledge, innovation, technology and entrepreneurship for the benefit of investors and the entrepreneurial community.
If you find yourself raising capital for a VC fund, consider the rights and added value that you can offer to your potential investors. With this in mind you can increase the chances of having a successful capital raise.
Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.
Ricardo Latournerie. VC Investor at ACV.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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