So far, 2020 has been a challenging year for venture fund administration. On top of a pandemic that has resulted in the worst economic downturn since The Great Depression, the competitive landscape is more fierce than ever. Many VC fund managers have had to transition from seeking new avenues for growth to merely keeping the lights on.

Despite this, VCs are still making investments. Knife Capital managing partner Keet van Zyl was recently interviewed about the challenges of conducting due diligence during the lockdown.
“A little bit has been taken out by the fact that you can’t actually have a proverbial coffee or wine and really talk through things and spar with one another and negotiate hard on these things face to face.
But at the same time, there are other ways to do this. Right now, we’re doing probably more full reference checks, with background checks on the entrepreneur by phoning those in your trust circle that you know they’ve worked with, maybe a little bit more than before.”

While some aspects of life have come to a standstill, your business certainly has not. Savvy VC managers can always find a way to uncover opportunities amid adversity. 2020 may be a tough year – but here are some suggestions on how to surmount some of its biggest challenges for VCs.

Time management

On a surface level, it may seem like it’s pretty easy to manage all the tasks required as a fund manager in a given week. However, time management is an issue affecting both new and seasoned VC managers alike.

  • Chances are your tasks in any given week might include:
  • Perusing your deal pipeline on the lookout for innovative ventures
  • Negotiating, syndicating, and closing deals
  • Meetings with entrepreneurs
  • Working to help your portfolio companies
  • Networking
  • Reporting to LPS
  • Comms across all aspects of your business
  • You may budget a set amount of time for each task, but no doubt you’ve encountered overflow and things consistently get pushed to the backburner. 

For example, the time commitment for an hourlong coffee meeting with a business prospect quickly balloons between scheduling, travel, and repeat meetings. Multiply that by 20 similar sessions per month, and you’ll wonder where your time went. You may find that this is less of an issue in lockdown, but wait till things open up, and you’ll be busier than ever.

It is essential to streamline your personal and operational processes as much as possible to ensure you are making efficient use of your time. Using the above meeting example – Having entrepreneurs come to you helps, but investing in scheduling tools or more use of teleconferencing are also both valid options.

Involvement in the board of those companies is also a significant time commitment – and not one you should delegate lightly with so much at stake. Yet having a voting corporate board seat can quickly add up to 100-200 hours per year – multiply that by several companies, and the time commitment is enormous. For some of your portfolio businesses, choosing to take a board observer seat is preferable, so you have the benefit of providing input without the massive time commitment.

Choosing investments in 2020

With more competition than ever in the private equity market, it can be difficult to source a steady pipeline of proprietary deal flow. After your initial meetings and performing due diligence, you’re likely only going to be backing 1 out of every 100 companies that come across your desk – so the quality of your leads is critical.

Getting to the point in your fund where you are attracting a steady flow of quality leads without doing a ton of legwork means ensuring both your brand and value proposition are on point.

When your fund is still small, it may make sense to forget about being a lead investor and focus instead on being a follow investor. While indeed less sexy than being a sole investor in seed companies, this VC fund structure approach is far less risky. You also have the opportunity during this time to build up your brand, which is key to attracting lucrative opportunities. Your value and relationship with those larger VCs, whether that be through market research or an industry-specific focus, will be created, and they’re more likely to bring you in as a value-add investment partner in future deals. By using a larger VC to help support your growth, you should emerge down the line in a strong position to take on a majority of lead investments.

As for performing due diligence, COVID-19 has wholly upended the normal state of things. Coffee shop meetings and office tours are out – Zoom meetings and virtual office tours are in. Extensive financial, background, and reference checks are essential – but choosing a business to back is as much an art as it is a science. You must interact with both the C-suite and middle management to determine how healthy the culture is.

LP relations and reporting

Your relationship with your LPs is essential, but even more so during the pandemic when there is understandably more tension. Many VCs have modified the investment terms with LPs to provide enhanced liquidation preference terms, expanded preferred stock voting protections, or the increased prevalence of redemption rights and shorter redemption periods.

More than ever, transparency in your communications with LPs is paramount. Justifying their investment and maintaining their confidence is more than sharing valuations and financial reports – you need to be consistently working to assuage their concerns:

  • Am I confident they can raise capital?

  • Am I confident in the team?

  • Can they handle times of adversity?

  • Will they make smart investment choices?

  • Do they stand out from the VC crowd in their niche market?

If your financial team has gaps, or you need a seasoned VC-financial partner to help guide your fund through COVID, consider bringing in a VC analyst.

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