This is the fourth in a series of articles.  This was published in Venture Capital Focus magazine in July 2002.

How to Manage a VC Fund

Would you like to run a Venture Capital fund? In this article I will outline what it takes. But first I should warn you there are easier and certainly faster ways to make money. For those with a lot of diligence and patience, however, I believe the business can be rewarding. Let me give you a breakdown of the processes in our business.

Setting Up a Fund

First, you need to have a fund to manage. Unless someone invites you to manage a fund for them, this means you will have to establish one yourself. To do this you need to find investors that are willing to commit money and an investment vehicle that is appropriately structured. One type of investment vehicle, for example, is a Venture Capital Company (VCC) under the Venture Capital Act. Creating a VCC is relatively easy, and the Act allows investors to join in later. An alternative approach is to find investors first, agree on their objectives and requirements, and then structure a fund that can optimally meet those. VC funds can be structured in many different ways. Apart from investment objectives, the legal and tax implications for investors need to be carefully considered too. What is right for one type of investor is not necessarily the best solution for another.

A truism in the VC industry is that fund raising always takes longer than expected. Even if you establish a fund quickly, investors do not part with their money easily. Especially in Trinidad, where a local track record for the VC industry does not yet exist. The only recommendation I can give is to exercise a lot of patience.

Making Investments

This process may appear to be most straightforward. It is easy, however, to underestimate the complexity and particularly the time required to perform it. To make investments you need to follow a number of consecutive steps.

To start with, you obviously need to find investments first. In countries with a well established VC industry this may not seem difficult. At the peak of the Internet boom, for example, the VC arm of Intel in the USA was receiving a hundred investment proposals per day. In Trinidad, however, our company currently receives investment proposals at a rate of about a hundred per year. To increase opportunities here we need to spend a lot more time and effort on finding and attracting investments.

Having found an opportunity, the next step is to evaluate it. I have no idea how Intel managed to evaluate a hundred proposals per day. I do know, however, that most proposals can be rejected quickly. It does not take long to review if an investment proposal is in an attractive market or sector, meets investment size requirements, and is backed by people with an appropriate level of skills and experience. Only if those initial hurdles are passed do you spend time on a serious evaluation. This typically involves several meetings with the principals, review of business plans and financial projections, and discussions to ensure everyone shares realistic expectations. Assuming the company is reasonably well prepared, this process can be wrapped up in two or three weeks. The policy at our company is to then formally take the investment proposal to our Board of Directors. If our Board agrees to pursue it we will issue a Letter of Intent to the potential investee company.

Only then does the hard work of investing start. As a professional investor you must perform a due diligence investigation on the company and its business prospects. Because VC investments are made in the form of equity you do not have any form of collateral or guaranteed repayment of the investment. Therefore, a VC due diligence exercise has to be more thorough than that for any other financial institution. You also need to spend time on negotiating the terms of investment. Invariably, the current owners believe their business is worth more than outsiders do. (In fact, you should be worried if they don't think so.) You will need to find an investment structure that everyone can live with. This structure, and all other investment terms and conditions, then need to be put into an Investment Agreement and accompanying legal documents. Expect the investee company's lawyers to get involved in this. Depending on the size and complexity of the investment, this process will probably take two to three months.

After everything is put in place, i's are dotted, t's are crossed, you can then prepare to close the investment. However, this may still take some time to complete. Our policy, for example, is to take every investment to our Board of Directors again for a final approval. If approved, we then require a minimum of fifteen days to draw down money from our fund. In the interim, the investee company can take whatever actions are required on its side to complete the transaction. Typically this includes amendments to the company's Articles of Incorporation and By-Laws. Only after everything is ready do you get to sign the investment agreement, write the cheque, hand it over, and break out the champagne.

Getting Results

After an investment is finally made, the temptation is to heave a great sigh of relief, kick back, and start to relax again. Unfortunately, the real VC game has only just begun. Everything up to this point only served to get the ball rolling. It means you have been able to spend your money and hand it over. You now need to maximize the return on, and of, your investment.

In a tiny nutshell, the key processes for this are: monitoring the investment, adding value where possible, and successfully exiting at an appropriate time. Monitoring is relatively straightforward and relies on regular reports from and reviews with the investee company. Adding value is more difficult and nebulous. Using ourselves as an example, we have neither the resources nor the desire to play an active role in the management of other companies. However, we do have the people and the intention to provide active and sustained support at the Board level.

Finally, the last element of the VC business is to sell investments. This is similar to the investment process in reverse. It is, however, the most unpredictable aspect of the VC business. Regardless of intentions at the start, you cannot know exactly when, how, and for how much money you may sell your investments again. You only know that it is likely to be several years after the initial investment, and that you finally hope to see a profit then.

Conclusion

Venture capital is patient risk capital. The processes and risks are manageable but it will require many years before the business generates results. Experiences in other countries show that results ultimately are positive: for the companies that benefit from VC investment, for VC investors, and for national economic development. We see no reason why such results cannot be achieved in Trinidad as well. We intend to contribute to them.

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