Ebb and flow: the VC fundraising cycle
April 17th, 2007 by Benjamin KuoOne of the key factors of venture capitalist interest in a company, is the simple factor: does a VC actually have money in the bank?
Yes—most entrepreneurs I speak to seem to think all venture capitalists are made out of money–but surprisingly, not all of them realize that the other half of the job of being a venture capitalist is out asking for money to manage, from Limited Partners (LPs). Those LPs, typically large institutional investors, pension funds, and University endowments, a use venture capital as one way to boost their returns and as a small portion of their asset allocation.
The ebb and flow of venture capital investments is closely linked with the fundraising efforts of venture capital firms–and the interest of a venture capitalist in your firm is directly linked to how much capital they have to deploy.
For example, if you approach a venture capital fund which is at the tail end of a fund, you’re going to find they are extremely selective–even if you’ve got an outstanding company and you fit their profile perfectly. The reason why is they just don’t have dollars in the bank to make sure you’re successful, and they’re likely reserving some capital for followon funding for their current portfolio firms. On the other hand, a fund which has just raised millions might be more eager to deploy that capital, and be willing to move faster to get a deal done.
A fundraising cycle for a venture capital firm is typically around three years, so you can get a sense for where they are if they have been announcing their new funds. Also, most venture capitalists are pretty open to letting you know if they are or aren’t making investments if you ask them.
