Venture capital investing is said to be an “apprenticeship business”—that is, you learn it by doing it. But your learning curve can be shorter—and your results better—if you learn from pros who’ve already mastered key parts of the business. In my nine years as a fund general partner, there certainly were many times when I wished I’d had a real pro to turn to for advice.
On September 29, as part of BDC Capital Fund of Funds’ FUNDamental Principals seminar series, we brought together top pros in the art and science of portfolio construction and management. They shared best practices with over 60 Canadian VC fund managers gathered at Ryerson University in Toronto.
The morning session was led by Richard Pugmire and Allen Waldrop, Managing Directors of LP Capital Advisors, a global firm that advises investors whose holdings total over US$57 billion in alternative assets, including venture capital. In the afternoon, Robin Praeger, CFO and Managing Director of Versant Ventures, shared his “in‑the‑trenches” view after 15 years—and five funds—with a very successful San Francisco life sciences VC.
Here are five key learnings I picked up across these two sessions.
1. Fundraising for your next fund begins with your investment strategy for your current fund
Investors will look back at what you said you were going to do, then assess whether you did it and how well. Of course, you have to be ready to change strategy if your target market changes around you. But make sure you think deeply before you shift direction because future investors will want a convincing explanation... and it will leave you less time to produce good returns from your portfolio.
2. Get your portfolio decision-making model right
Different teams have different cultures and therefore make decisions differently. Regardless, make sure all partners completely buy into the answers to critical questions such as the following: Who gets a vote? On what? When? Can any one partner make or kill a deal? If so, what are the consequences? Remember, your basic job is to deploy your investors’ capital in high‑risk investments. But it’s often the deals you don’t do that can save your portfolio.
3. In each portfolio, consider assigning one partner who thinks ONLY about the portfolio as a whole
A portfolio is much more than a collection of individual companies. It’s a capital pool that has to produce outsized aggregate returns over a 5‑to‑10 year period, managing many, many millions of dollars in cash flows over that time. So having one partner—maybe your CFO?—think only about the total portfolio, while others think about their individual companies, could elevate your team’s view above the “your deal/my deal” level.
4. Think very, very hard—and often!—about reserving capital for follow‑ons... it’s your portfolio’s lifeblood
There’s nothing worse than losing out on the final upside of your best deals because you came up short of follow‑on capital. So write down your reserve policy clearly, establish amounts aggressively and review them with all partners often. And be ready to make the hard decision to shift reserves from a low performer to a portfolio‑maker when the situation demands it.
5. Get the right data right
Think about what data you need to allow you to manage—not report on—your portfolio companies. Then collect it relentlessly and manage by it, always.
Venture capital fund management is a hard business to get right. But learning and following best practices from domain experts can improve your odds of success. We at BDC Capital Fund of Funds will continue to present learning opportunities for Canadian fund managers as part of our FUNDamental Principals seminar series.
Look for our next event early in 2016, when we hope to take the sessions to Vancouver for the first time! Drop me a line if you’re a partner in a VC fund and want to make sure you receive the invitation.
All your comments and input are welcome. Please leave them below, and I’ll be sure to respond.