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VC: Invest in Other Funds

    1. Short Description
      1. By investing in other VC funds at an earlier stage, you can generate dealflow and learn about the market. You can make this investment personally or through your fund. When you invest in another  fund, you can build a close relationship with that manager and understand their thinking better. That will help you evaluate deals they bring you. You will want to be careful about confidentiality and conflicts of interest.
      2. This strategy is more common for later stage investing. For some funds, it can be a key sourcing strategy and an explicit part of the deal when investing in underlying funds. The opportunity to invest in the “winners” from a fund directly without (as many) fees attracts some LPs.
    2. Benefits:
      1. High Quality Leads: The referrals that you receive from this GP are more likely to be high quality. As you have a relationship, you can compare their comments on one company with another.
      2. Tracking: The funds reporting gives you the chance to track many companies at once. You may choose to pursue a company based on that information.  Or you may be better prepared to make an investment decision when the company is raising money.
      3. Market Intelligence: A portfolio of LP investments may provide you with market intelligence. The ability to see trends earlier and compare metrics helps you in other decisions.
    3. Trade-offs:
      1. Managing Confidentiality:  As an investor in the other fund, you will agree to keep their information confidential. And there may be other restrictions on information use.  If you invest personally, you may need permission to share information with your partners. If you make the LP investment as a fund, this may be less of an issue.
      2. Handling Conflicts of Interest: If you invest personally, you will want to disclose the fact to the fund manager and to your partners.  Your LPs may want to know the process for identifying and managing potential conflicts of interests.  Likely your LP stake is much smaller than your GP commit. So your economic interest is with your fund (besides to other duties of loyalty). But you do not want the impression that you are pushing forward a deal because you already own shares.
      3. Uses Capital: Investing in someone else’s fund uses money that you could be investing in your own fund.
      4. Signaling to Your LPs: Your LPs may want to know that your outgoing fund investment is a sourcing strategy. You do not want them to believe that you believe the other fund is a better investment.
      5. May Not Be Allowed: Check your internal fund policies and your agreement with your LPs. Is it allowed?
    4. Examples
      1. Foundry Group
      2. Industry Ventures
      3. Sapphire Ventures
      4. Some family offices
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