

Most VCs see investments of under $5 million as a waste of time - nreece
http://www.xconomy.com/boston/2009/01/07/the-lowdown-on-angel-capital-from-commonangels-james-geshwiler/

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pg
Geshwiler's mistaken. The more progressive VCs are happy to deals of half a
million or less. Even the stodgiest are interested in deals under 2 million.

A partner at a famous firm was recently telling me about one of their favorite
portfolio companies. Their initial investment was $300k. He was not bummed
about that; he was delighted.

What "moves the needle" for a fund is the ultimate value of the shares they
buy, not how much they cost. That only moves the needle of the fuel gauge.

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staunch
I was under the impression that VCs only get paid their management fee on the
portion of their fund they've got in play. I thought that was the explanation
for why they still like to invest a lot of money in each company. Doesn't that
come into play, at least for the lower tier VCs, who probably won't do well on
actual returns?

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skmurphy
They get a management fee based on the total size of the fund, not just those
that have been invested. It's typically between 2 and 3% of the fund per year
and in addition to 20% of the profits made, if any, from investments.

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staunch
That's the part I was unclear on. So if they take a billion dollar fund
they're earning $20 million/year even if they've only invested $50 million of
it so far?

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skmurphy
Yes, and for a top tier firm it's closer to $30 million.

It's a perverse incentive for increasing the size of the fund, which in turn
increases the minimum investment: number of deals is a function of partner
bandwidth, deal size is fund size divided by number of deals (you have to
allow for follow on investments so it's the total amount invested over all
rounds).

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steveplace
I take Roger Ehrenberg's viewpoint about the hedge fund industry and transfer
it over to VC capital: it's turning into a barbell. The probability of getting
either seed stage or a huge investment is much higher than anything in the
middle. It's going to depend on the underlying business and expectations of
growth, and there's also capital management and psychological factors, but my
guess is that trend will continue.

