complicated concepts

How venture capital has changed over time

I’ll admit, that was a bit clickbaity. There are actually a lot of challenges with being a VC. So much so that we’ve talked about some of these challenges before, like navigating different check sizes while fundraising, managing back-office operations and achieving lucrative exits.

But it’s true, investing in the private markets has never been easier than it is today.

Over the years, we’ve seen a combination of new technology and legal structures that have become popular amongst VCs, lowering the barriers to entry of writing checks into startups.  

We’ll get into these new trends below and what this means for emerging managers ... but first, some background information. 👇

A little history lesson

Investing in early-stage startups is not the same as buying stocks that are publicly traded.

With publicly traded companies, you can head over to your favorite brokerage platform and, in a few clicks, buy shares of the next hottest company.

In the private markets though, the investing process is not as seamless. As a fund manager, you need to set up a legal vehicle to collect money from your LPs, review and align on the investment documentation with the prospective company, send out deal information, and collect funds from your LPs… sound like a lot?

Well, it is.

In the past, all of these steps had to be done manually. Which was not only a ton of work, but also A LOT of money.

Needless to say, if you were thinking about entering the world of venture capital as an emerging manager, it was pretty daunting.

Today though, the landscape of starting a career as a fund manager has changed dramatically, and the thought of writing checks into startups isn’t as scary as it once was. Here’s why.

Let’s talk tech

Let’s say you found a company that you want to invest in. The founders love you, and you have a handful of investors who are excited to invest with you.

Where do you go from here? Do you call your local attorney and ask them to start the paperwork? You could, but this could take weeks and tens of thousands of dollars.  

Luckily, technology providers have built solutions that make starting your investment business a breeze. Shout out to our friends at Sydecar and AngelList 🤝

Platforms like these take on the administrative burdens that come along with investing in the private markets.

Did you know that you actually need to register your investment entity as a legal business in order to make an investment? What about verifying the identity of your investors, or sending them their tax forms every year?

These are all things that VCs are responsible for doing, and technology platforms handle these responsibilities for you. Software has significantly democratized access to venture capital investing, and we’re here for it.

Okay, now that the administrative hurdles to investing in the private markets have been addressed, let’s talk investment vehicles.

Investment Vehicles

The emergence of different types of investment vehicles has enabled emerging managers to raise capital efficiently and provided increased flexibility for how VCs run their investment businesses.

The traditional venture fund is a type of entity that managers use to raise capital from their LPs to invest in startups. Using a traditional venture fund, managers can spend upwards of two years raising capital from investors before they start investing in companies.

This type of investment vehicle isn’t for everyone, and it is particularly difficult for emerging managers to use given their lack of track record, limited investor relationships, and other factors.

As a result, there has been a surge in popularity recently of emerging managers using alternative investment vehicles to begin their investment business, like rolling funds and special purpose vehicles (SPVs).

Let’s talk about why SPVs have empowered new emerging managers to become VCs.

Benefits of using SPVs as an emerging manager

SPVs are legal vehicles that are created for a VC to invest in one single company.

Emerging managers use SPVs, especially when they first start investing in the private markets, as a way to share their deal flow with prospective investors without having to market their extensive track record and experience.  

Imagine you’re an LP, and a VC says to you: “Here is the deal I’m fundraising for and all of their company information, would you like to invest with me?”.

Versus, “I’m looking for investors to commit capital to my fund. I don’t know which companies I’ll be investing in yet, but this is my plan.”

The first statement makes me a little more comfortable as an LP.

SPVs give emerging managers an opportunity to build their performance track record, strengthen their communication skills, build strong investor relationships, and showcase their value to founders.  

What matters most when you’re new to the VC game?

We know that software has made it much easier today to enter the world of VC. But software alone won’t bring you deal flow, enable you to co-invest with other VCs, or introduce you to new LPs.

Venture capital is an industry built on relationships. And for you to get good at it, you’re going to have to meet people.

At Hustle Fund, we strongly believe in the power of building relationships in this ecosystem.

In fact, we host an annual retreat settled in a magical forest in northern California for investors to meet. Every year, VCs, emerging managers, LPs, and family offices come together to create meaningful connections and have a blast.

This year’s retreat is coming up in May. 🤩

If you’re ready to take your VC game to the next level and build lasting relationships with other like-minded folks, you can register here.

This article was written by Tucker McKay. Tucker is the founder of Ikaria Labs, a content marketing agency for funds, fintechs, and financial services companies.