Every few months, news breaks that a well-known investor is leaving a firm to start a new VC firm. To outsiders it can look like a dramatic split. Usually it’s more routine. Venture capital is a business of small partnerships built around individual relationships, and those partnerships constantly reshuffle as people find that their ambitions no longer fit in the same room. Understanding why helps you read these announcements with a cooler eye.
How a venture firm is built
A venture capital firm raises money from limited partners, such as pension funds, endowments, foundations and wealthy families. The firm’s partners invest that money in startups and take a management fee, typically a small percentage of committed capital per year, plus a share of the profits, known as carry. The carry is the real prize, and it’s usually split among partners according to a negotiated formula.
That formula is where tension starts. The person who finds, wins and supports the best deal might feel they deserve a bigger slice than the partnership gives. Or the firm wants to grow into larger funds while one partner prefers a small, focused style.
Common reasons for leaving
- Economics. Running your own firm means a bigger share of the carry and the freedom to set fees.
- Strategy. One partner wants to specialize in a sector, stage or geography the rest of the firm doesn’t prioritize.
- Fund size. A smaller fund can generate better returns relative to its size. Many investors leave when their firm outgrows the type of deals they like.
- Independence. Having your name on the door means control over hiring, decision-making and brand.
- New chapters. A person with a strong public profile or a successful track record outside investing may want a vehicle that matches their identity.
The challenge of raising a first fund
Leaving a famous firm sounds easy when you have a record, but a new VC firm still has to prove itself. Limited partners want to see:
- A track record they can attribute. Which deals did you really lead? Reference calls with founders will test the story.
- A clear edge. Why do founders pick you? Access to talent, operating experience, community or technical knowledge could all be real advantages.
- A disciplined strategy. Check size, portfolio count and reserve policy should make sense together.
- A team that can last. One celebrity partner isn’t enough. LPs worry about what happens if that person loses interest.
A big name helps open meetings but doesn’t close them. Limited partners have seen plenty of famous founders and athletes launch funds that returned little. Past success in one field doesn’t transfer automatically to picking startups.
What founders should think about
If you’re a founder pitching a new VC firm, the usual diligence applies, with a few extra questions:
- How big is the fund, and how much is reserved for follow-on investing?
- Is this new VC firm backed by a team that has worked together before? How many partners are there, and who will sit on your board?
- What’s the firm’s experience with companies like yours?
- Are the people working the deal the same ones who’ll support you later?
After a deal falls apart or a company needs more cash, the hard choices companies face after layoffs show how much a patient, experienced investor matters. A brand-new VC firm can be an excellent partner, often more attentive than a giant fund with dozens of companies per partner. It can also be inexperienced with the practical grind of board meetings, down rounds and follow-on financing. Neither outcome is guaranteed.
Why a new VC firm still needs a track record
It helps to picture the first fund from the limited partner’s side. A pension fund or endowment that backs a new VC firm is taking two risks at once: that the partners can pick good startups, and that the business of running a firm will hold together for ten years. Funds in this asset class are typically locked up for around a decade, so the commitment is long and hard to undo.
That is why many first funds are small. A modest size lets the partners write meaningful checks without needing a giant hit to return the fund, and it gives them time to build a record under their own name. Some investors raise a small first fund, prove the approach, and return to the same backers with a bigger second one.
For founders, the practical lesson is to ask what the partners did before the launch and what they plan to do after it. A clean answer is a good sign. A vague answer about “supporting great founders” tells you little. Ask for introductions to founders the partners backed at their old firm, and ask those founders what the partner did when things went wrong, not only when they went well. A new VC firm that welcomes those calls is usually confident in its record, and a new VC firm that avoids them deserves extra questions.
The pattern behind the headlines
Venture is cyclical. In boom years, many new funds appear because capital is easy to raise. In slower years, LPs concentrate their money among proven firms, and newcomers struggle. A launch announcement is therefore a bet on both the partners and the timing.
Spin-outs also reshape the industry. They create specialists, bring new geographies into the funding map and sometimes nudge older firms to change their own models. Some of today’s biggest names started as a couple of partners leaving a larger shop.
How to read the next announcement
When you see a new VC firm launch, skip the buzz and look for specifics. How large is the fund? What’s the stated focus? Who are the other partners? Is there a history of working together? Those facts say more than the headline.
The best new VC firms are built around a distinct point of view and a team that has done the work. The weakest are built around a famous name looking for a new hobby. The difference usually shows up within a few years, and the returns, as always, take a decade to be known.
Featured image: Abbotsford House Study Room.jpg by Michael D Beckwith, CC0, via Wikimedia Commons.
