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Venture Capital Fund Opertaions

Delivered November 11, 2019. Contributor: Lisa M.

Goals

To obtain a better understanding of how to set up a venture capital fund in the US & Israel. Specifically, to get a better understanding of operation, finance, and the legal aspects. Additionally, to obtain an overview of how Aleph.vc is structured and how they make decisions.

Early Findings

Starting A Venture Capital Fund

  • In order to start a VC Firm you need a track record. Go join an established fund, and build a track record. At least a partial one. At least invest in 2+ companies that can be Unicorns. You won’t have truly proven yourself. But it may be enough to raise a small fund.
  • Start as an angel investor, make some good investments, and then, after proving yourself as an angel, raise a small fund. Perhaps $5m, $10m, $20m to start — mainly from Very Rich Individuals.
  • Partner with someone starting a Venture Capital Firm.
  •  Investopedia shares the necessary qualifications to become a VC:
  • Do you have an MBA? Fifty percent of VCs do. If you do, did it come from Harvard University or Stanford University? Sixty percent of VCs with MBAs graduated from one of those schools.
  • Do you have experience working for a reputable firm in technology, consulting, investment banking, media, or a startup?
  • Do you have a strong social media presence? This is especially important with LinkedIn, where 85% of venture capitalists have a presence.
  • Do you have expertise in a certain technology? Do you understand this technology better than anyone? Will people go to you for answers when they have questions about this technology?
  • Do you keep up with the top VC blogs and technology news sites?
  • Do you have a successful investment history?
  • Do you plan on working with a partner? If so, you better like that partner, because you will spend more time with him or her than you would with a significant other. Will you be able to agree on financial decisions with that partner?

VC Model

  • The 2 and 20 Venture Capital Model - The basic model in venture capital is “2-and-20”, or 2% in committed capital paid in fees annually, and 20% of the profits going to the partners.

Equal Partnerships

  • An equal partnership in VC is exactly what it sounds like. All the partners equally own the firm, and therefore have the same say in any decision and enjoy the same economics regardless of the company invested in, regardless of which of us found or lead the deal, and who sits on the board etc.
  • Equal Partnerships are relatively rare in VC.
  • Each firm makes decisions in different ways, so understanding the firm's decision framework matters. Some firms are "consensus driven" and look for unanimity in the decision (or near-unanimity). Some partnerships are "conviction driven" meaning they're looking for a super committed partner who will slam his or her proverbial fist on the table to push through a deal.
  •  Benefits:  
  • Better Diligence: While we all see lots of companies on our own, once we start to take a potential investment seriously we work like a pack. The dynamic of an equal partnership ensures that there’s no ego around who did the deal or who will ‘own’ it.
  • No Funding Politics: With an equal partnership you know what you’re getting. Everyone is the same. Everyone voted for the deal or agreed to do it. If one investor ever blocks something that may have helped another, it’s because they genuinely think it’s a bad idea and, as painful as that might be at the time, it’s probably the right thing to happen.
  • Better Support: Start-ups take time. The average successful company is often in the portfolio of an early stage VC for around eight years. In that time, you will confront different kinds of problems. If all the partners in your VC are equally incentivized, you can call on different people at different times to get the help or attention you think you need.

Aleph

  • Their website may be viewed here.
  •  Aleph is an Israeli VC firm that focuses on early stage company from around the world.
  • Alpeh recently made 27 year old Aaron Rosenson an equal partner.
  • The partners believe that with three partners and even eventually more, they can cover the Israeli startup scene while also jumping on opportunities abroad. "Being a partner only firm (and an equal partnership at that) we experienced, again and again, situations where there are great founders and startups that we just couldn't evaluate because we were already in process with other great teams," says Shochat.

Resources

  • VCPreneur discusses the structuring of VC firms in depth.
  • Forbes has an excellent article written by Prototype Capital discussing the challenges they face.

Proposed next steps:

You need to be the project owner to select a next step.
As this is a vast topic, we recommend narrowing it down to three categories; operations, legal, and Aleph.vc. We recommend further research to 1. determine the top 2-3 legal pitfalls that new VCs encounter. For each pitfall we will provide a description, an example if available, and how to potentially avoid the pitfall. 2. Provide the organizational structure of an equal partnership VC. We will provide an overview of the operational structure, noting how decisions are made, and how vetos or opposing opinions are handled. 3. Conduct a media search for Aleph VC for 8-10 mentions of how they are organized or how they make decisions. We will do a 12-month search for relevant articles. For each article we find we will provide a description of the article and a link to the article.
Additionally, we recommend research to provide 2-3 best practices for starting up a new VC Fund. For each practice we will provide a description of the practice, how it benefits the company, and an example of the best practice being used.