Venture Fund of Funds have been a great source of capital for venture managers for decades & are often the group that Emerging Managers speak with when raising.
However,it’s important to have visibility into the business model/process/allocation styles.
Some basic thoughts/
However,it’s important to have visibility into the business model/process/allocation styles.
Some basic thoughts/
1/ The core historical model for most FoF is granting their LP’s entry into hard to access venture managers and providing a level of diversification; as expected, cultivating brand name relationships/access drives commercial viability of a typical FoF raise.
2/ Economics for a pure FoF vehicle is fairly light (i.e. 50bps-1% management fee, and ~5% carry), so AUM growth is important, and with premium access acting as catalyst, the bulk of time will be spent on building and maintaining a book of “franchise” names (some exceptions)
3/ range of outcomes for a traditional FoF is 1.5-2.0X. Very few FoF’s I’ve seen consistently hit >2X net DPI w/o a sleeve for direct investing. Many FoF today are very active in directs, either through separate vehicles or a small % of their core funds (usually Series A/B+)
4/in the past 10 years, EM investing is definitely an active part of FOF mandates, w/ funds like Greenspring, Sapphire, Industry, Horsely, etc. representing larger FoF that have been active– But they see everything&have large portfolios of EM’s, so bar is VERY high for new names.
5/ For many FoF to bring on new names, they often have to divorce prior managers; the average FoF portfolio is <25 line items and making room can be tough; not supporting an existing manager is hard to do reputationally. As such, many established FoF only add 1-3 names/year.
6/ Since 2010, several FoF’s formed that are wholly focused on EM’s i.e. Cendana, Foundry Next, Plexo, Ahoy Capital, etc. Some of these firms will make pilot investments in early managers to build a relationship (usually $1MM-$3MM)w/idea of scaling in later funds for performers.
7/ We have also seen international FoF invest in US EM (i.e. Vintage and Blue FP are two that come to mind). Many of these are interesting as they are still building out their books.
8/ For most first time funds, FoF discussions are just relationship building exercises for future funds; particularly so with saturation levels, and so many existing managers coming back earlier than expected. Still a good opp to get feedback and professionalize early.
