First-Time Investors: Choosing The Right Fund Structure
The trouble with being a first-time VC is that you may have the resources, but you may not know what to do with them just yet. And half the time, you’re trying to figure out what the pros are doing while being in the dark yourself. This is what happens when you don’t have the right fund structure.
Thankfully, in our most recent DiffuseTap session we had the chance to get some valuable insights from first-hand experience from two U.K.-based VC experts to give newbie investors some tips to starting out: Tom Britton, co-founder of SyndicateRoom, and Farhan Lalji, Principal at the Anthemis Group for Investment – Venture Partnerships.
DiffuseTap is a weekly virtual event hosted by Diffuse that is part networking (you’ll meet at least a half dozen high calibre startup players) and part purposeful (you’ll DiffuseTap new ideas). If you’re interested in meeting new folks who can help you boost your fund, feel free to ping us.
Common mistakes of first-time funds
One of the biggest mistakes new investors make is going with the wrong fund structure. Farhan shares that from his experience, a lot of newer investors get up and running before they actually understand the dynamics behind different fund structures.
And therein lies the problem with gauging GP commit. Farhan shares: “you have individual investors [who] think they’re going to raise a huge fund, and then the LPs want to see that the GPs have got skin in the game, usually by putting up a significant amount of their net worth. This can make it extremely difficult to get a diverse group of investors as GPs in new and emerging funds, especially when some people may be sitting on illiquid assets and don’t have direct access or ability to invest significantly to set up a new fund.”
And so, the problem is how do you get investors to make that GP commitment when they don’t necessarily have access to that kind of wealth, whether that be one or two per cent of a $100 million fund? Farhan said this is a common issue when funds don’t have the right structure for what they’re aiming for.
Untapped institutional capital
Farhan shares that another thing he’s seen happen often is investors not going after some of the other institutional capital available to them. Farhan said that beyond pension funds and other more popular resources, investors aren’t engaging national government institutions that are looking to deploy capital into venture funds early enough or through the right channels.
Farhan cited the British business bank and the European Investment Fund as examples, which have a long timeline from when they first meet you to when they make an investment. Most investors leave it until much later to engage these institutions, Farhan said, but these should be the first on the list because they take the longest to activate. “These are things that people just aren’t aware of here in the U.K.,” Farhan added.
Choosing the right VC structure
Tom shared that they had to go through a trial-and-error process to get their fund structure right. Before SyndicateRoom was a fund, they were a platform first and foremost, and their underlying asset was letting individual investors make small investments into companies.
So when SyndicateRoom decided to pivot to being a fund, one of the considerations was how they could build a large number of LPs without a GP. With that question in mind, their fund allowed people to invest from 5,000 pounds, about one fourth or one fifth the minimum of a typical UK fund, and they had 300 individuals invest immediately.
The other thing Tom shared they took into consideration when setting their fund structure up was the deployment structure. Tom shared: “For most of the people that were investing in the U.K. at our level, we were doing it for a tax relief incentive, which was done on an annual basis.”
“So to continue to accommodate what they wanted as investors, we set about to do annual deployments of our fund in a completely evergreen structure. To an effect, anyone who comes into the fund is putting money in. Fourteen days later, once they’ve cleared down and done all the AML and KYC stuff, their money starts to get deployed into fresh deals,” Tom shared.
And with their structure, there is no pro-rata. Investors are effectively getting their own “mini-fund” within SyndicateRoom’s wider fund vehicle. And they’re also not getting companies that the fund has already invested in.
“We looked at things like funds structure, the fees that we charged, carry that we charged, deployment, annual versus three-year versus five-year, and all the different other metrics that we could tweak to differentiate us from a traditional two-and-20 fund,” and that’s how they got their fund structure down, Tom shared.
Tom Britton is the Co-Founder of SyndicateRoom, a fintech company that started as an online investment platform connecting individuals to angel investments and eventually pivoted to becoming a fund, co-investing with angels who were outperforming the entire market.
Farhan Lalji is the Principal at the Anthemis Group, one of the most prolific FinTech investors, for Investment – Venture Partnerships. Anthemis has made over 100 FinTech-focused investments across the U.S. and Europe, including in companies like Betterment, Happy Money, and Currency Cloud.
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