Fund managers and VC firms use several types of funds to carry out their investments.
Each has their own advantages and disadvantages.
There are flagship funds — the ones that get all the press. If you’re around the VC industry, you hear about these all the time.
Then there are non-flagship funds like opportunity funds and growth funds.
There are several names for non-flagship funds but they all serve the same purpose: to complement the main funds’ investment activities.
In this article, we’ll break down:
- the recent rise of non-flagship funds
- how fund managers are utilizing them
- why they might increase the chance of survival for emerging fund managers
But first, it’s important to point out: this trend is only a few years old.
The role (and rise) of non-flagship funds for VC firms
In 2010 among all of the total funds raised by VCs, only 10% were non-flagship.
9 years later, over 30% of the total funds raised by VCs were non-flagship.
That’s 3x growth in just 9 years.
So what’s going on here?
More and more VC firms use non-flagship funds to complement their main investment activities.
VC firms use non-flagship funds for several reasons:
- Offer existing LPs additional exposure to a top performer in the VC firm’s portfolio
- Inject cash into the highest performing subset of a portfolio
- Build a formal relationship with a key LP that missed the flagship raise
Another interesting trend: 2% of VCs in the US operate exclusively under alternative fund structures like SPVs. No flagship fund required.
At Allocations, we believe technology plays a role here: with better technology comes easier to use, non-flagship private equity products — like SPVs.
We’ve seen this with our clients who run a hybrid fund-SPV structure.
SPVs may be the most popular non-flagship investment vehicle but there’s another type of fund that’s rising in popularity fast: the opportunity fund.
The rise of opportunity funds
Opportunity funds play an important role as VC evolves.
Since 2015, opportunity funds have contributed just over half of all capital raised by the non-flagship market. 54% to be exact.
With that much share of the private capital markets, what are opportunity funds used for?
Primarily, they’re designed to fuel growth in a firm’s most promising startups as they mature.
Maybe a VC firm is seeing above average results from one company in their portfolio and they need to inject cash to fuel this growth.
Or maybe there’s one subset of their portfolio that’s outperforming the others — might as well double down on your winners.
On the investor side, LPs might be attracted to opportunity funds because of the upside they can capture from an IPO or SPAC. Bigger checks, sure. But even bigger payouts too.
It’s the same reason LPs like to invest in early-stage companies: the rewards outweigh the risk.
We’ll illustrate this point further in the next section …
Opportunity funds and SPVs
SPVs have typically been used to fuel early-stage growth where capital is critical for survival.
For investors, putting their capital into SPVs provides the largest upside in the shortest amount of time. Small checks, large returns.
In the later stages, opportunity funds play a similar role.
They give LPs a way to capture the upside of a startup's growth, without exposing themselves to the risk at the early stages. Bigger checks, bigger returns.
That being said, SPVs are much more common than opportunity funds.
“Since 2015, SPVs have contributed just 5% of capital raised by the non-flagship market but are the most common type of non-flagship fund, accounting for 42% of vehicles over the same period.”
But we’re seeing a trend among successful VC firms and fund managers: they use both.
And as we’ll see in the next section, the VC firm or fund manager that offers both SPVs and opportunity funds to their clients succeed more often than those with flagship-only structures.
Non-flagship funds aren’t a nice to have, they’re a must-have
With more streamlined tools available to fund managers, raising and managing non-flagship funds is easier than ever.
Plus, they can help you survive in the highly competitive world of venture capital.
Different Research reports: “VCs that have raised some form of non-flagship fund vehicle are nearly 5 times more likely to have made it to Fund V and beyond.”
And that’s the goal isn’t it? Raise fund after fund, regularly capturing returns for you and your LPs.
(p.s. if you’re an emerging fund manager, we have a 5-minute post that may help you get from Fund I to Fund II in less than 12 months.)
Fast, hassle-free SPVs can help get LPs into opportunity funds
Opportunity funds require larger check sizes, making it difficult for individuals to take part.
So emerging fund managers and smaller VC firms have to get creative.
SPVs can help fund managers bring in more investors. Instead of writing one check and taking on all the risk of that capital, LPs can pool funds to meet the minimum check requirements to qualify and participate in opportunity funds.
Opportunity funds are a necessary tool in the emerging fund managers toolkit
Fund managers that use hybrid SPV and opportunity fund structures succeed more often than those that don’t.
But managing all these funds and LPs can be too much at times.
That’s why we’ve built Allocations: to make managing your funds and SPVs hassle-free. And fast!
10,000+ investors and fund managers have simplified their investing workflows on Allocations.
Disclaimer: The information provided in this document does not, and is not intended to, constitute legal, tax, investment, or accounting advice; instead, all information, content, and materials available are for general informational or educational purposes only and it represents the personal view of the author. Please consult with your own legal, accounting or tax professionals.