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So a VC is investing in you — great news. But then you see a string of names and numbers in their investment vehicles and you wonder, what is really going on. This post clarifies five major ways that a fund might be investing in you.

Quick recap that LP = Limited Partner i.e., the investors in a VC fund. These are often individuals, family offices, fund of funds, corporates, pension funds, endowments; in smaller fund the first two are dominant, in larger funds it’s the latter four often collectively called “institutionals.”

1) Opportunity Fund — What happens if new LPs want to invest in a VC fund that is already closed? Sometimes the VC will go back to their existing LPs and ask for an exception to reopen the fund. Other times they might accelerate starting their next fund. The norm in the US is that 50% of the main fund be committed for new opportunities — the thinking is do some good deals first instead of raising on top of a raise. A third way is to create an opportunity fund, which often has the mandate to invest in a slightly different manner than the main fund to minimize potential conflict of interest. A common set up is the opportunity fund adds more dry power to existing investments, say the main fund does the prorata and anything extra goes to the opportunity fund. Another common set up is the opportunity fund will do investments in different stages (say late vs early), geographies (say outside US), verticals (say in cars when the main fund is focused on robotics) and/or structures (crypto, secondary, public market etc). For an entrepreneur getting an investment partially from the main fund versus the opportunity fund is more a matter of book-keeping, the biggest impact is really how the VC is giving returns to its own LPs.

2) Special Purpose Vehicle (SPV) — A SPV is a vehicle created specifically to make the investment. VCs will often do a SPV if they are aggregating capital outside the main fund to increase their ownership into a company. The VC will also often charge a management fee and carry on the SPV, usually a bit higher than those of the main fund. In the US the current norms for main funds are

  • management fee of 1.5 – 2.5%, with a median of 2%
  • carry of 20%, although some larger funds have been known to do 30% and a minority do deal by deal carry (ie different percentages on each investment rather than a single number for the whole fund)

Once again, what the SPV really impacts is the VC’s own returns. Typically the entire SPV gets the rights, say for example prorata, so an entrepreneur who wants something else should clarify it with the VC leading the SPV.

3) Cross-Fund — Cross-fund is the practice of investing through multiple main funds. In the US most VC funds are for 10 years, with a new fund getting raised every 2-4 years, which means that at any given moment a fund might have capital for new investments through 2-3 vehicles. Cross-fund investments are less common in the industry because they typically have different LPs. That said VCs may have set it up legally and/or earned enough trust with their LPs to be able to balance competing interests from their LPs to be in the best deals. And in such cases they can also divide the investment to smooth out the returns among different funds, for instance to show higher performance in a particular vintage.

4) Evergreen Fund — Evergreen refers to the ability to draw capital indefinitely. Some large corporates or banks with VC arms can be looked upon as evergreen. Similar case for a handful of VCs that have maintained the same set of LPs across various vintages, for instance having the same university endowments as LPs over and over. Cross-investing is obviously a much easier proposition for evergreen funds since the returns go to the same LPs. All that said, evergreen funds are rare, especially these days, and an entrepreneur might not even be aware their VC is such a fund.

5) Scout Fund — Scout funds have emerged really in the last 10 years, with large funds wanting to have a front row seat in early deals but not having the bandwidth to manage, diligence and/or source them. In Silicon Valley this typically means multi-stage funds of $1B+ that give a small checkbook to folks they trust in the ecosystem, oftentimes an entrepreneur they have worked with. The scout can write say 10 checks of $100K after a handful of maybe even one meeting in say a seed stage, with the idea that when they go for later rounds the main fund will have first dibs. If you are an entrepreneur raising from a scout caveat emptor: you can run into signaling risk if the main fund doesn’t do at least its prorata in the next round. A common mitigant is to then have at least two if not multiple scout funds invest in you, which increases your optionality. As an entrepreneur you should also clarify whether your tagline is “X Scout” invested or whether “X” is an investor — “X” will almost always carry more weight for PR.


Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.

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Amit Garg
I have been in Silicon Valley for 20 years -- at Samsung NEXT Ventures, running my own startup (as of May 2019 a series D that has raised $120M and valued at $450M), at Norwest Ventures, and doing product and analytics at Google. My academic training is BS in computer science and MS in biomedical informatics, both from Stanford, and MBA from Harvard. I speak natively 3 languages, live carbon-neutral, am a 70.3 Ironman finisher, and have built a hospital in rural India serving 100,000 people.

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