Realistically, single strategy venture funds are notoriously a “hit or miss” gambler’s bet despite the exceptional track record of a very few funds. Our focus is first on investing with leading, top performing venture funds as well as a very few early successes, emerging manager funds, and second on those funds deployed within the technology growth segments on which we maintain a strong belief in its high value creation growth potential and delivery of superior returns.
With a growing opportunity for investors to construct optimal portfolios by better assessing risk opportunities across the entire venture capital class, investors are turning to the expertise, knowledge and resources that FoF firms provide. Simply stated, a venture FoF is a multi-manager investment strategy of holding a portfolio of venture capital funds rather than investing directly in venture-backed securities.
FoF represent a means by which an investor can reach the relatively high minimum capital commitment ($1 million+) through pooling their investment with others, thus gaining access and broad exposure to a select group of funds. In addition, a FoF typically scrutinizes venture capital general partnerships for accuracy of reporting, historical performance and value creation of invested entities, among others. A good FoF may also provide pooled access to the very best performing, top-tier venture funds.
Generally, a FoF has greater leverage in scrutinizing a venture firm’s investment talent while assessing the accuracy of its financial reporting. They’re also assessing more than the reported returns, such as multiples of cash back rather than straight IRR. FoF seek a safer, more diversified investment base from which to drive reasonable returns, across shorter investment cycles, versus today’s typical 10-12 years.
The reasons for the impressive growth of FoFs is that they provide diversity among the very best venture fund managers, access to top-performing funds, reduce risk and hold out the promise of net returns higher than the average venture capital return rates. Investors are more willing to invest in FoF for the benefits provided by this pooled investment structure, continual due diligence and ongoing oversight compared to investing in a single strategy venture fund.
Essentially, FoFs can offer an investor access to the top-tier performing best venture capital fund managers not otherwise accessible directly.
Selecting a venture firm or fund manager
The selection process of either brand name venture firms or emerging fund managers should entail research of their respective track record of investments, actual hands-on value creation involvement within their investments, the firm or emerging fund managers’ lure and stature within the entrepreneurial community (deal flow source) and, most importantly, the ethical reputation and transparency in reporting performance returns.
Do some serious research here, as the term “success has many fathers” applies in spades to self-published venture materials. You may wish to consult with an experienced venture law firm or venture advisor who can draw on substantial limited partner and general partner expertise, and expose the many significant incongruities and styles in how funds generate and distribute returns.