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Limited Partners Put the Heat on Venture Capitalists

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In a recent New York Times article entitled Some Unrest Is Bubbling Beneath the Top Tier author Matt Richtell shares a key issue faced by venture capital firms -- satisfying limited partners.

Limited partners are the firms that invest billions of dollars in venture capital firms so that they can then invest in high-growth ventures.

At the end of the day, limited partners want a return on their money. Specifically, they want distributions from their investments in the venture capital funds, and they want it in a timely fashion. "It's been almost a decade," said Eric Doppstadt, director of private equity for the Ford Foundation, which invests in venture capital firms. "I find it shocking that an asset class that has provided so little payback continues to attract so much capital."

What may be most interesting is that success in the venture capital industry has been "highly concentrated among fewer than 40 venture firms." So, while firms like Kleiner Perkins, Sequoia, Benchmark and select others are earning nice returns for limited partners, most of their peers are not.

Part of the challenge is that it typically takes six years from the point when a venture capitalist invests in a start-up company to the time that the startup exits and the investor sees a return (and can pay their limited partners). Since we're only six years past the bursting of the dot com bubble, limited partners are going to have to wait a few more years before seeing their returns go up again.


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GABRIEL BOATENG-APPIAH says

I think the awareness is not there,more education in transactions with venture capitalists must be carried out.

Posted at 12:20 pm
Larry says

Maybe part of the problem is the specifics of the deals. It seems to be hard to attract a VC for a 2x or 3x return to be paid back in 2 to 3 years where they dont also want a big chunk of your company instead of just taking warrants if the deal go south. They (VC) are only interested in intellectual property deals and a significant chunk of the company. So much for emerging growth industries and hot items. Thats all just talk, saying the right things, the buzz words, but not really believing it. We had only 1 VC interested in our deal and he wanted 10x, 30% and 3 seats on the board. Now I am talking to an Investment Banker Group at a 7 year prime plus 6 deal, no %, and no seats. Its what we all hope for, let's hope I can close it. But to the VC's, thats why they call it venture - nothing ventured, nothing gained! We'll see how they react next year when we go looking for 150 million.

Posted at 2:05 pm
Bob Dickson says

A few broad, overall comments:

1) First, most investors would know to distinquish between reported gross fees, before compensation, and net fees, after compensation. The difference in returns can be significant and the only return that is realized by an investor is the net fee.

2) Investors should evaluate the risk/reward of inversting in a vc fund as compared to another asset class. For example comparing the risk/returns to small cap value stocks over the last 10 years will surprise many.

Posted at 4:03 pm
John Hunter says

Isn't it a two-way street when investing in Ventures? I'm not to familiar with this type of investments. I've recently begun checking into stocks and shares, and such.

John

Posted at 5:32 am

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