The phrase “venture capital investing” can seem intimidating but, venture investing isn’t as complicated as it seems. Just like any other investment opportunity, there are some basic things to understand.
To gain a better understanding of venture investing and the opportunities available to women, we sat down with four female fund managers on our most recent Leading Voices episode. We spoke with Amber Illig, General Partner, The Council Fund, Gale Wilkinson, Managing Partner, Vitalize VC, Tessa Flippin, Founder and Managing Partner, Capitalize VC, and Lindsey Taylor Wood, Founder and GP The Helm.
What Is a Venture Fund?
A venture fund is a pool of money contributed by Limited Partners (LPs) and managed by the General Partners (GPs). The Limited Partners look to the General Partners to make the investments into scaleable start-ups that meet the fund’s thesis criteria and have passed through the due diligence process.
A venture fund is analogous to an index fund in that you are investing in a bucket of companies that the fund managers have selected. The difference is that, unlike a stock market index, the companies in a venture fund are all privately held.
How Are Venture Funds Deployed?
Each venture fund has an investing strategy, or thesis that determines the types of companies they will invest in. The strategy also includes the size of the check they write per investment, the number of companies they invest in, and at which stage (pre-seed, seed, Series A). The fund is deployed over a specified period of time according to the fund thesis. The General Partners determine their investment thesis based on research, strategy, and expertise. A thesis can be as broad as investing in diverse founders or, it can be more specific, for example, fintech solutions for developing countries.
Lindsey Taylor Wood explained, “Once the fund is raised we invest according to our respective thesis. At The Helm, we invest in female founders from Pre-Seed to Series A.”
Limited Partners see a return on their investment when the companies the fund has invested in have some sort of liquidity event. For example, a sale of the company or taking the company public which generally will happen within 10 years of your investment.
“It’s important to note,” added Tessa Flippin, “that when investing in a venture capital fund you are investing in a blind pool. Essentially you’re investing in the fund manager and their ability to invest on your behalf. As a Limited Partner, you don’t get to choose what the fund thesis is, how capital is deployed, or what companies get investments. That’s the difference between investing in a fund versus investing as an angel investor.”
What Are the Roles Within a Venture Fund?
Limited Partners are the investors in the fund, they are usually high-net-worth individuals or family offices, who are managing the wealth of multiple families. Limited Partners can also be corporations that have the capital to invest through a venture capital firm or financial institutions. General Partners are the fund managers who invest alongside the limited partners, contributing up to 2% of the fund. The General Partners make the investing decisions. A Managing Partner is the person who runs the general partnership.
“The Limited Partnership is the fund. What sits on top of the limited partnership is the general partnership, which is the entity or group of people that make the decisions on behalf of the limited partners. The term ‘General Partner’ (GP) is somewhat interchangeable with the term VC or venture capitalist. So a GP is just a venture capitalist that is managing that fund,” noted Gale Wilkinson.
Who Can Invest in a Fund?
You must be an accredited investor to invest in a fund or in a privately held company.
According to the SEC, to meet the criteria of an accredited investor, one needs to possess a net worth exceeding $1 million or have earned an income exceeding $200,000 in each of the last two calendar years, with an anticipated continuation of similar earnings. Additionally, individuals holding financial licenses such as Series 7, 65, or 82 are also eligible for accreditation.
Tessa Flippin detailed, “Accredited investor is a label the SEC has given to people who have the level of wealth required to invest in venture capital. You are automatically considered an accredited investor if you fit one of [those] two buckets.”
She continued, “Many funds use 506 B, which is a designation by the SEC that says people can self-qualify as an accredited investor. This allows you to check the box allowing you to become an LP in that fund. Other funds, like our fund Capitalize, use the 506 D rule, which means that we have to verify that you are accredited. We require that your accountant or attorney signs a form that says that you are in fact accredited.”
Explaining Due Diligence
Due diligence is the process a fund undertakes to appraise a company and assess its viability as an investment for the fund. The fund partners evaluate the founders, the company, its assets, liabilities, and the market opportunity and TAM (total addressable market).
“At The Council fund, we heavily evaluate the founding team because we invest early knowing that the business model could change and move in different directions. We look at the team’s vision, resilience, and mission,” detailed Amber Illig.
“The mission and vision are vital because if they have a personal tie to what they’re building versus just trying to make a lot of money, they’ll [typically] be more successful. I’m not looking for get-rich-quick schemes. If they’re looking to exit the company in one to two years, we probably won’t see a huge markup on it. But if they are willing to grow it until it gets to the acquisition stage or IPO stage, that could be huge” (Amber Illig).
What Is the Difference Between Investing in a Fund and Investing As an Angel Investor?
When you invest in a fund, you are relying on an experienced team to make investment decisions on your behalf. When you invest as an angel investor, you are making investment decisions yourself, investing directly into a company.
What Is an Angel Investor?
An angel investor is an individual who directly invests in a company. Traditionally angel investors come in at $25,000-$100,000 but SPVs (special purpose vehicles) and angel syndicates have made it possible for women to start investing as low as $1,000 depending on the opportunity presented. Most investment opportunities require that you be an accredited investor, but not all.
What Is an Angel Syndicate or Investing Group?
Angel syndicates are groups of independent investors, or angel investors, who review individual company investment opportunities together as a group. Investing with a group gives you access to other investors’ expertise, greater deal flow, and an opportunity to invest alongside a group of like-minded individuals.
“I’ve been involved in Angel groups for about almost 12 years now and it’s a really good way for people who want to invest directly to get started,” said Gail Wilkinson. “I suggest that early investors invest via syndicate or group versus doing their own direct investment unless they have really, really good deal flow. When you’re involved in an angel syndicate or group, you get access to education and networking. Most importantly, deal sourcing and diligence is done by the syndicate lead.”
Investing in venture is one of many strategies for growing your wealth. Be sure to weigh the risks, ask lots of questions, and do your own diligence before diving in. Joining an investing group or an angel syndicate is a great way to invest alongside other women who are also learning.
To hear the full discussion and learn about investing in any of the funds mentioned in this article watch the video. To join their angel communities, reach out directly via their websites.