LP Series: Introduction & Purpose


Fund of Funds Investing – Our View


The surge of new venture capital in recent years is highly encouraging. Many established venture teams are launching new funds faster and with greater frequency. Five years ago, it might have taken a venture  team over a year to raise a fund. More recently this has been achieved by several teams in just a few months. And they are often not waiting until completion of the commitment period of the previous fund to launch the next fund. This trend is reflective of the cycle of capital expansion and retraction that moves with the overall economy.  This period of easily accessible capital appears to be nearing an end. The recent access to capital has also attracted numerous new, first-time fund managers to the industry. As long-time Limited Partners (LP) investing in several funds, we track new fund managers for potential future participation to maintain a scan of the General Partner (GP) market to plan future capital allocations. While we have sidestepped many pitfalls to which some LPs can succumb, some of what we are writing in this Series comes directly from learnings and errors made. 

This set of guiding principles related to fund of funds investing has provided a platform by which we consistently achieve overall alpha returns. These principles have been built on our direct investment experience, direct fund management experience, our fund of funds investment experience and being actively engaged with each team with whom we invest. As an LP, we respect venture capital managers and it is our hope that a few GP teams might appreciate our frank and written perspective.  

The views presented in our series of six LP articles (“Series”) on various issues is not about right and wrong. It’s about preferences.  As one GP has noted, “GPs are in the money rent business”.  Sometimes the landlord does not want to paint the kitchen or upgrade the tiles.  It is inevitable that sometimes capital objectives and fiduciary responsibility will differ from the desires of the renter, but it is LP capital afterall. 

In response, some assert “Don’t invest in that team/fund”.  This is a clear option. Yet, differences often emerge after capital is commited despite the very best due diligence because the set of future circumstances inevitably present a great or unique opportunity.  LPs being then committed do not have that optionality in the moment, at least without penalties that are usually severe. Most regrettably, some LPs become dissatisfied and sacrifice ongoing collaboration – potentially severing what could have been a good long-term relationship with the GP. 

Venture? GP? investing is entirely a relationship business and earned trust is a major contributing factor to committed capital over a series of funds. When we look for new GP relationships, we’re seeking permanent relationships. The decision to invest with the team can only be made once the trust is established; this can take significant time. This is why we maintain contact with many GP teams in which we are not invested.   Receiving a slide deck by email for a fund with a near-term close and where no relationship exists, we decline immediately.   

The views we have chosen to publish in this Series may or may not harmonize well with all GPs and we also certainly respect the LPs who have differing perspectives. It is our intent to seek alignment with prospective GPs. By establishing a basic alignment of perspective at the outset of the relationship, we can only increase the probability of a strong relationship over a long series of funds.

We recently declined investment in a venture fund that was well known to us. After the fund had its first close, the GP wanted to know why we passed. Our answers were honest and respectful and provided during a face-to-face meeting.  Their team was as interested in having the conversation as we were. Some of our feedback will be incorporated into their business model and some will not, but they were genuinely appreciative. This experience heightened the likelihood that, as they expressed, direct LP feedback is lacking in our industry and a catalyst for this Series. Just as GPs have elevated the turndown of entrepreneurial pitches to high art, LPs often cast flair with a similar brush. We cannot speak for all LPs, but we can offer our perspective. This Series simply seeks to highlight what is important to us and to that end, we submit our views. 

Warren Bergen
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Warren Bergen began his work at AVAC Ltd. in 2011 and was promoted to President of the organization in 2015. He established AVAC’s BridgeCo Capital Fund I with Mark Carlson in 2017. Warren is a member or observer member of the Limited Partner Advisory Committee for several venture capital funds. Warren is a Partner of Accelerate Fund I, L.P., an early-stage technology fund and serves on several boards including Alberta Machine Intelligence Institute(AMII).

Mark Carlson
+ posts

Mark Carlson began his work at AVAC Ltd. in 2009 and was promoted to Managing Director of the organization in 2015. He previously worked with several funds and co-founded BridgeCo Capital with Warren Bergen in 2017. Mark is a Partner in Accelerate Fund I, L.P. and is a member or observer member of the Limited Partner Advisory Committee for several venture capital funds. More broadly, Mark has managed the full cycle of venture transactions including serving as a Director on numerous boards and has completed 50 marathons.