When raising professional capital (venture capital, investment banks, etc.) it’s important to remember that, like you, the “investment professional” across the table is a component in a much larger system called Private Equity Investing.
When you’re not around, the VCs and Bankers (Managing Partners) are in your shoes asking for investment capital from their Limited Partners (LPs). The LPs are the individuals and institutions actually funding your company, while the VCs are paid to select the companies to invest in on the LP’s behalf.
For an in-depth look at the inner workings of a venture capital firm, we recommend reading “Chapter 8: How Venture Capital Funds Work” in Venture Deals, by Brad Feld and Jason Mendelson.
Feeling the Heat
But venture capitalists aren’t sweating because they’re afraid you know the game, they’re feeling the heat because the economic returns of venture capital for the LPs who fund them are looking less than stellar when compared to Public Market Equivalent (PME) investments. The best assessment of the causes for this lackluster performance is detailed in the Ewing Marion Kauffman Foundation’s “WE HAVE MET THE ENEMY…AND HE IS US”: Lessons from Twenty Years of the Kauffman Foundations’s Investments in Venture Capital Funds and The Triumph of Hope over Experience (May 2012).
From a founder’s perspective, the 51-page review of the the Kauffman Foundation’s investment experience in VC funds might seem like overkill, but the executive summary alone should be enough of a confidence booster for future negotiations.
So the next time you find yourself in front of VCs who think they have the Midas touch, remember that in the eyes of their LPs, that’s rarely the case.
About the Kauffman Foundation
The Ewing Marion Kauffman Foundation was established in the mid-1960s by the late entrepreneur and philanthropist Ewing Marion Kauffman. Based in Kansas City, Missouri, the Kauffman Foundation is one of the largest foundations in the United States with an asset base of approximately $2 billion.