Are all VC firms equally "Institutional" ?
A total surprise to start the week. Its one of those things that you least expect but it restores your faith in things. That ecosystems mature and evolve. Room for arbitragers reduces over time and then, professionals take over. So, I heard from a senior VC who met a well- known Government Fund that allocates funds to VC firm-managed Funds for investments into startups.
" We have come to the conclusion over the past 10 years of our journey that there are 2 kinds of VC firms
-✳️Promoter -driven : ie where one person calls all the shots but makes a pretence of being an "institution" through Fund documentation showing Investment Committees (IC) / Key persons etc.
( all IC members report to this one person and depend on him/her for their monthly emoluments, annual raises and carry. You can imagine how "independent" their view is and how much it actually weighs into any investment decision")
✳️Institutional : ie where the Founder(s) < 51% and thus, a group of talented individuals discuss and make decisions like a true "institution" or a typical corporate boardroom with shared accountability.
Thus, we would like to have information on how profit-shares, Fee income and Carry is structured between the various IC members since this affects morale and eventually tenure of those who will lead investments and thus, returns. We want to ensure the team we see today is going to be there tomorrow at end of fund life"
While this stumped my VC peer but it is a clear precursor to an ecosystem reset in 2024 and beyond.
LPs such as Govt Funds, Foreign Fund of Funds (FOFs), HNIs and Family offices have long been given to understand that a license from SEBI is some sort of "certification" that a VC firm is "Institutional" based on a private placement memorandum ( PPM) filed by the firm. Many of you who are looking at #VCcareers also fall for this. No different for #startupfounders who think of all firms as equally "institutional"
But, that's not true.
The composition of the IC in the PPM hides the true relationship between those very IC members and this is found only in the agreements of the entity of the VC firm ( LLP / Pvt ltd co).
It determines decision making, compensation design and risk on tenures of so called "Partners", "Managing Partners" and other fancy titles. This is why I suggest a simple 5 minute " Entity Check" , of the VC firm entity, in mca.gov.in
Ref to the link here ( rb.gy/2h5lz3) for a step by step way to do so.
The results will tell you how to differentiate between 2 VCs :
✅ Promoter-driven : where the ownership share > 51% with one individual ( you will find that in such firms, LLP agreements may be between a person and his related party e.g spouse, family trust etc and not with other IC members )
✅ True Institution : No one person or related parties >51% . Fair relationships exist between IC members
#venturecapital
#VCreset2024
#Morethanmeetstheye