Having Won Over VCs, Y Combinator Turns to LPs
techcrunch.com
techcrunch.com
LP = Limited Partner
(I think)
So they can invest in a general thesis, but can't direct funds towards a specific company. The general partner (GP), typically an employee of the VC firm, manages the specific allocation of money into deals. The restriction to acting through a layer of management is a legal requirement in order to give the LPs the protections afforded by the LLP structure.
Generally, a limited partnership have been useful when there is a plan not to bring on additional investors later, since later investors are able to renegotiate terms. In other words, LP's are common when all the money ever needed is going to be raised at once and any future expansion of the project will be funded by traditional loans [a construction loan for a shopping center] and from projected revenues [e.g. ongoing maintenance of the shopping center once it is operational].
This also means that projects structured as LP's are not really tailored to take advantage of hockey stick growth. Though an LP may use equity growth as a means to an end, the focus is usually on income, and matching the cashflow objectives of LP like investors is why individual Venture Funds have limited lifetimes.
1) Private Equity funds (including VC funds) are often structured as Limited Partnerships. The PE/VC firm and/or its principals are General Partner(s) in the Limited Partnership. Investors are Limited Partners.
2) LLP = Limited Liability Partnership
3) LPs usually refers to Limited Partners (referring either to the Limited Partners in a particular fund, or to PE/VC investors in general)
4) Not all the money needs to be invested up-front. Partnerships can be set up such that an amount of capital is committed up front, but drawn down from investors on an as-needed basis.
From the individual partners point of view, their investment fuss are committed upfront with the expectation that that commitment is adequate for the entire project. Should the funds prove inadequate the investor may not loose their shirt but will consider themselves lucky to escape with shortened sleeves.
If you thought we were already in a bubble, hang on to your seats, it's about to get much worse.
What is probably more of an issue is that wide-scale bag holding will trigger new regulations that will make it much hard for startups to raise money in the future. Even if people want to invest it might prove impossible to raise money in practice.
The biotech IPO window was almost closed from ~2000 to 2012-2013. Look at it now! Companies with nothing more than a promise raising $150M+ at IPO. I haven't kept track, but it wouldn't surprise me if close to 100 biotechs have IPOed in the last 2-3 years.
At least 121 from Jan 2013, to Feb 2015:
http://www.forbes.com/sites/brucebooth/2015/03/20/biotech-ip...
And the Nasdaq biotech index (NBI) has skyrocketed, from 1,000 four years ago, to a recent peak of 4,000 before the plunge (after having barely moved for a decade previously).
Apparently most people's memories don't even go back as far as 2008.
"Worse" for whom? It may be worse for investors because valuations may increase, but overall having more money in the startup ecosystem, funding companies that may make the world a better place, isn't the worst possible thing to have.
As far as retail investors go, I am a bit concerned there but on the other hand anyone can blow money on lotto tickets or casinos and with those you're statistically guaranteed to lose.
I would like to see some requirement that retail investors are presented with a big fat warning that reminds them that this is a high risk investment and that they could lose all their capital. Granted they should know that, but people are biased and often forget.
Of course lotto tickets don't come with such warnings, so hey maybe it's fair.
My biggest concern isn't so much with the investor side but with what effect this might have on the signal/noise ratio in the startup world. I fully expect to see a ton of scammy shallow "companies" trolling for funds, and it'll make it harder on those with more substance than flash.
Those expectations will have to meet reality sooner or later, and when that happens:
* Life savings will be wiped out
* Liquidity will snap back for startups
* Many otherwise healthy companies will die
I don't think it's wrong to open more investments to more people, but I'm also a bit wary of it being a total free for all shitshow.
http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalis...
Mark Suster, from Upfront Ventures, has a really great list of blog articles you can read about raising VC: http://www.bothsidesofthetable.com/pitching-a-vc/
This should give you a general idea of how VC's operate: http://founderequity.com/the-new-reality-of-venture-capital/
better than a LP investing direct in a early-stage startup. This is bad for both, the startups gets an unexperienced investor and the LP don't get to manage portfolio the right way.
The full phrase is to treat your <insert business relation> like mushrooms: feed them shit and keep them in the dark.
> “I find [YC’s] batches are always the best of any accelerator class or demo day that I attend,” says the LP, who asked not to be named. “I’ve found a number of opportunities that were as exciting as any we’ve pursued.” YC’s endorsement, he says, is “a very important signal to us.”
An admittedly more cynical reading of this:
* Family office LP has very limited experience investing in privately-held tech companies.
* LP relies heavily on signals like "YC participant" because LP brings no unique investing insight to the table in this area.
The vast majority of LPs have no business investing directly in startups because they have no ability to add value to the individuals and institutions they represent, are incapable of performing adequate due diligence, and don't have the bandwidth or experience necessary to manage these kinds of investments.
Whether or not the current turmoil in the public markets is the start of something bigger or not, LPs itching to make direct investments strongly suggests that we are at or close to the peak in the current tech investment cycle.
On this topic I spoke to my agent in China about the Chinese stock market back in May when it was going straight up. He told me that all the waiters were talking amongst themselves about what stock to buy, etc.
Wouldn't this just indicate that VC firms are charging too much for LP's to invest in a VC, or that there's some rich investors out there (LP's) who are willing to risk direct investments in small businesses, rather than investing blindly in the stock market?
Why would more direct LP investments indicate a peak in an "investment cycle"?
1. There's a broader trend of LPs moving to invest directly in alternative asset classes. There are a number of reasons for this. FOMO is one in this particular market.
2. Because the market is so hot, folks are more interested in ground-floor (seed stage) investments that are harder to get exposure to in traditional venture funds.
You must also realize that optimizing these direct investments is a PITA. Newbie direct investors are going to learn a lot of harsh lessons when it comes to pro rata rights in this market, assuming they even ask for and get them.