How a Venture Fund Capital Call works

Many angel investors who are actively considering becoming a Limited Partner in a venture fund have questions about how capital calls work.  Angels are used to making a commitment to fund a deal, then writing a check or wiring funds and they’re done until the deal exits.

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Venture capital funds are designed to maximize investor returns, and have an investment period of up to four or five years, so rather than take all the money at once and literally have millions of dollars in an escrow account, the fund uses “capital calls” to collect money from investors only as it is needed.  This way an investor can keep their funds in a liquid investment vehicle such as a mutual fund or 401K retirement account that is hopefully appreciating or earning interest until the capital call occurs.

When the fund is preparing to make an investment, it issues a capital call to its Limited Partners.  The LPs then typically wire funds to the VC escrow account and when all funds are collected, the fund then closes on the investment and wires funds to the portfolio company.

What all this means to the Limited Partner is that they will not need to remit their entire commitment when they join the venture capital fund.  They may have an initial capital call for 10% or so of their commitment, and the rest would be allocated over a three to five year period.  So, someone who invests $200,000 in a venture capital fund might only be investing $50,000 per year for four years. There are two things to think about in terms of fund strategy that LPs should be aware of in order to plan for their investment.

  • Most funds invest in 15-30 companies, although there are some that invest in significantly greater or fewer numbers. So, you should plan on about 20 investments for a typical fund that is diversified across multiple portfolio companies.
  • Most funds retain 25-50% of the fund for follow-on investments. This allows the fund to participate in second and third rounds and maintain their pro-rata investment percentage in the companies.  If the fund invested in twenty companies in the first round, it may double down on only four or five of those for the second rounds to profit from the companies that look like they will provide the greatest returns.

The Capital Call Spreads out the Investment Over Several Years

So, if you’re thinking about becoming a Limited Partner in a fund, understand that capital calls are a good thing that are designed to maximize your return on investment and spread out the requests for funds over a period of multiple years as the fund makes its investments.

Happy Investing!

To learn more about the Rockies Venture Fund, I LP, please contact us at peter@rockiesventurefund.com (720)353-9350
To schedule an in person meeting to learn more, visit www.rockiesventureclub.org/peter
Also, visit www.rockiesventurefund.org

 

 

Venture Capital for DummiesPeter Adams is Executive Director of the Rockies Venture Club, Managing Director of the Rockies Venture Fund and teaches in the Colorado State University MBA Program.  Peter is co-author of Venture Capital for Dummies, (John Wiley & Sons 2013) Available at Amazon, Barnes and Noble and your local book store.

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