My latest column for The Kernel. It was published last Thursday.
The LP Update Meeting
Everybody answers to somebody, Nic Brisbourne reminds us. What happens when VCs are hauled into the boardroom to justify their investment decisions?
I’m just back from our semi-annual update to the LPs in one of our funds, and I thought I would share the experience with you all. As a reminder, LPs, or limited partners, are the investors in venture capital funds. They are typically pension funds, insurance companies or specialist investment houses known as FOFs (“fund of funds”).
These meetings are the equivalent of board meetings for our portfolio companies. We have around a dozen LP update meetings a year across our four funds and they are the most important moments of contact we have with our investors.
My hope is that the following description of the meeting will help explain the information we request from startups and the pressures we sometimes find ourselves under which we then have to pass on to our portfolio companies.
The agenda at the meeting today was similar to the usual agenda and I’ll go through each of the four items.
We see our LPs relatively infrequently; they each look after interests in a large number of venture capital and private equity funds, and they occasionally shift responsibility for looking after our fund to new people, so we always begin by reminding them of who we are, why we are special, and our investment strategy.
Then we update them on how we are doing compared with our peers and on any changes to personnel and our funds under management.
Having set the scene about us, we go on to provide data on the market as context for the performance of our funds. One of our slides today showed VC exits over $100 million since 1996, split between the US and Europe. The data shows that there were over 150 such exits for US companies, up from around 100 per year in the previous peak in 2005-2007, whereas Europe has yet to exceed the 40 or so deals at this level we were seeing at that time.
We were seeking to make the point that our recent good run of exits was impressive, given that we are based in Europe, and that the high level of US deals last year bodes well for Europe going forward, provided the macro-economic picture holds.
Another slide showed venture investments in Europe by sector, and provided the basis for a discussion about our sector strategy. (Our mission is to back the best entrepreneurs wherever they are, so compared to our peers we expect to be overweight in some less fashionable sectors.)
This is the longest and most important agenda item. We present the performance of the overall fund and comment on changes since last time, with a particular focus on changes to the value at which we are holding our investments.
Then we talk through the key portfolio companies in some detail. We typically focus on the top half-dozen by holding value and the partner responsible for each of these assets presents a couple of slides covering what the business does, why it is important, how the company has been performing and the likely timing and value of the exit.
Having been pretty quiet for the first couple of agenda items, the LPs typically spring to life with questions during the portfolio update. They are keen to make sure they fully understand any changes in fund performance and our plans for the key assets.
They are on the look-out for discrepancies with what we have presented previously, whether we have sufficient reserves, and any signs that we are too bullish about our valuations or exit projections. (One of the unfortunate legacies of the poor performance of most of Europe’s VCs in recent years is that LPs have become a cynical bunch.)
There are strong parallels between the way we present our portfolio and the way our portfolio companies present their revenue projections and pipeline at board meetings. It is during these sessions that confidence in the future is built or destroyed, and credibility as a manager is won or lost.
They are hugely important for us, as the LPs in our current fund are the best prospects we have to be LPs in our next fund. We are therefore prudent about setting expectations, including for individual portfolio companies, but having set expectations it becomes very important that we meet or exceed them.
In this section we discuss any pending changes to the firm that our LPs need to be aware of – and, in some cases, approve. For example DFJ Esprit’s merger with Tempo Capital that was, by coincidence, announced today, was discussed under this agenda item in a previous meeting. Fund extensions and annexes are also discussed here.
I hope this gives you some insight into a little talked-about aspect of life as a VC. In particular, I hope it comes across that VC partners have to stand up and make commitments about the performance of the companies they have invested in.
When working with portfolio companies our primary motivation is to help them be as successful as possible. The quality of data and the accuracy of projections that we report back to our LPs is an important secondary consideration, but, at the end of the day, it is results that count.