How do VCs raise the money that they invest in your startup? Robert Antoniades gave a fascinating glimpse of the process as a guest of Startup Grind Toronto back in March. Antoniades is co-founder and general partner at Information Venture Partners, which invests in startups catering to the enterprise and fintech markets.
“There is general apathy in the pension fund community for this asset class,” says Antoniades, referring to Canadian tech startup shares. “The 50 largest pension funds don’t see a need. In the last 15 years performance has not been great. Pension funds still need us to prove it.”
Why are memories so long among fund managers? They carry a huge weight of responsibility.
Big responsibilities and far horizons make for long memories
The trillions of dollars that fund managers invest today dictate whether you or your children will have an old age pension.
Fund managers aim for returns of 5% -6% per year. Fund managers have to deliver that return every year despite the gyrations of the stock market. Events like the Dot Com Implosion of 2000 and the Subprime Meltdown of 2008 are nightmares for fund managers.
How do fund managers walk this tightrope? They invest about 40% of the portfolio in low-risk bonds and about 60% in equities. Most of the equities are dividend paying stocks of blue-chip companies. A few drops from the equity bucket, about 5% of the total, are allocated to “alternative assets.”
These assets are a varied lot: real estate, infrastructure, hedge funds, private equity, gold… and venture capital. What they have in common is the potential for high returns.
Every year fund managers review the strategy to ensure that the mix of asset classes is generating the returns they need. Competition for fund manager investment is fierce, especially so in the alternative asset class.
Given the life-long timelines fund managers think about, they tend to favor investments that deliver predictable, recurring revenue streams that last for decades. At the top of that list are real estate and infrastructure.
Hedge funds, private equity, venture capital are seen as further out along the risk curve. You buy and hold. There is little or no cash flow along the way. On the other hand if the fund does well the returns are huge.
Fund managers face bewildering choices. Consider private equity. “There are $10 billion-plus super funds, $2 billion to $10 billion funds, $1 billion funds and micro funds of $500 million and under,” says Antoniades, “each with its own strategy. There are regional variations in Europe, America, Asia.
“As an example, it can take a year to do the due diligence to identify mid-market Japanese buyout funds as a promising opportunity,” says Antoniades, “but which of the 12 buyout funds do you support?”
“Most pension funds don’t have the in-house talent to assess each of these asset classes.”
Some invest in the jockeys, not the stables
Some fund managers focus on the managing partners. Star managing partners do emerge. Funds they manage pay out returns among the top 20% of all funds. Antoniades points to two such – Spark in New York and Index in the UK. You won’t find many hotshot MBA grads in this group. To be a member of this club you must close at least 2 successful funds. Some fund managers think that’s not enough and prefer managing partners with a record of 4 to 5 successful funds.
“The Ford Foundation,” says Antoniades, “has no formal allocation. They find and invest in the best managers, period.” The Ford Foundation has wound up with 15% of its funds in alternative assets.
Another strategy is to allocate, but with higher weighting on alternative assets. “University endowment funds in the U.S., Yale and Harvard in particular, are incredibly overweight in venture and private equity,” says Antoniades, and have “up to 35% of their funds invested in alternative assets.”
Reasons for hope
Despite the challenges Antoniades still sees many reasons for hope. He has closed a very successful fund with his partner David Unsworth. Together they have raised over $50 million for a new fund. Antoniades is confident they will reach their target of $100-125 million.
Through the work of Antoniades and others, the cycles of venture capital are better understood. Antoniades likens the process to buying wine. There are so-so years and outstanding years. It is impossible to know for certain which is which when you buy and the results take years to show. But the outstanding vintages command huge prices. So if you buy some wine each year you will eventually accumulate a cellar of stellar wines that pay back the rest of your investment many times over.
Another promising development: “there are now over 100 incubators and accelerators,” says Antoniades. This helps to ensure a steady stream of high-quality early-stage companies.
And, says Antoniades, the quality is there and getting noticed. “There’s been a lot of interest from U.S. general partners. Canadian companies we’ve invested in have raised a further $100 million from U.S. VCs. (For them) it’s more difficult to find good companies with reasonable valuations. And when you look at all Canadian startups, funding from US VCs is much higher.”
Antoniades also says that “the Venture Capital Action Plan is a bright spot. Money from VCAP is finding its way to the right hands.”