In 2011, Zoom, which is doing cloud video conferencing, raised about 145 million U.S. dollars, mostly from Sequoia and Emergence Capital, which has invested in Salesforce. Zoom conducted an IPO in April 2019. The stock price soared by 72% on the first day of listing. As of the close of the first day of listing, its valuation reached 16 billion U.S. dollars, making it one of the most popular IPOs that year.
However, Emergence Capital, which invested in Zoom, was not satisfied. Because as an early GP, they led a $30 million Series C financing of Zoom in 2015 and are Zoom’s largest investor. However, Emergence Capital failed to lead Zoom’s D round in 2017 and was replaced by Sequoia. At that time, Zoom was valued at US$1 billion, and it was already a huge unicorn.
The founder of Emergence Capital regretted that if there was a fund that could only be used in the later stage, and could continue to bite good projects like Zoom that were discovered in the early stage, they could have taken the lead in the D round of Zoom and took a lot of arrogance.
People’s achievements. Therefore, Emergence Capital went to raise its first opportunity fund.
#1 Opportunity Fund is a tool for early GP to expand investment range
If it is said that during the economic upturn, the market is a rising ocean current rich in nutrients, and the opportunity fund is like a school of fish seeking to draw energy from the general trend to grow itself. GPs with high-quality deal sources have used other funds or SPV structures to raise more and more funds in addition to their core funds. Fund pools outside of these core funds are called opportunity funds (opportunity funds, Also called opps fund).
During 2000-2010, only a few specific early-stage funds (such as USV and SBCVC) raised similar funds due to the rapid growth of early-stage investment companies. But in the past 10 years, opportunity funds have gradually become a common tool for many early GPs to expand their investment range and enhance their competitiveness.
Opportunity funds allow early GPs to avoid being thrown out of the profit circle when the investment projects take off in the later stages, and at the same time to ride the rising tide of valuation . Simply put, the Opportunity Fund gives early GPs the opportunity to continue to benefit from fast-growing projects. If a company invested by GP wants to start the next round of financing, and this round of financing can still increase the price, GP can take advantage of pro-rata (same-rate co-investment) before the company’s valuation soars to an unattainable level , Seize the opportunity.
John Backus is the co-founder and managing partner of PROOF.VC (through pro-rata, helping early stage funds to do late-stage strategic planning). He was one of the first people to see the potential of opportunity funds. In 2004, John launched a relatively small-scale opportunity fund, invested in 4 companies, and got a return of 2.5 billion US dollars when he exited. He found that the J curve and cash return of opportunity funds can also be very beautiful, so he later raised one period after another of opportunity funds.
Subsequently, USV further improved the framework of the opportunity fund. Fred Wilson wrote in a blog in 2011 that the opportunity fund is an opportunity for early GPs to “charge the core fund instead of opening up a new direction.” Today, 10 years later, stimulated by the market’s upward trend, the opportunity fund has also begun to heat up sharply.
The tendency of investors to move forward in the later stage of investment is becoming more and more obvious, which means that relatively small, early-stage funds must plan for future investment. Therefore, as the portfolio matures, they are raising opportunity funds step by step. If the market is in a downward trend, you will not see so much opportunity funds, however, because a lot of the company’s performance so good that more GP can go to find him their LP said, take a look at our portfolio, which continue to vigorously shots and These companies.
#2 5 principles, 8 types
Up to now, to become an opportunity fund should roughly follow 5 principles:
1. It is a strategy that is slightly different from the core fund, but is closely related.
Often extend some stage: a GP early focus will be to raise a late opportunity funds, and a focus on growing / late GP may raise an early opportunity-based gold (it may be a more partial post-funds) .
This is important, because if the fund’s strategy and core exactly the same words, in the not to get the case of existing LP approved, melt the identical parallel investment fund often because of conflicts of interest by existing LP questioned. Of course, GPs can generally obtain LPAC approval for the new fund, but the specific situation still depends on the terms of the LPA and the structure of the fund itself.
2. Focus on those investment strategies that were “unproven in the beginning”. With the development of the market, GPs have confirmed that there is a specific type of opportunity. Only this strategy of this fund can attract similar opportunities and also allow LPs to obtain good returns.
For example, this type of GP often talks to LPs like this: If we follow the B/C/D/E/F rounds of company A that we are particularly familiar with, we can earn 10 times, 50 times, 100 times. Times the cash return. We also have a few very familiar companies X, Y, and Z. The angel round of investment is very good, and the relationship with the founder is very good. At this stage, we should take it out and vote.
Yes, everyone loves cash rewards, but at the same time, both LP and GP have to seriously consider whether this type of strategy is a unique macro/micro opportunity at this point in time, or a change in the entire industry ecology, which can last longer Under the framework of the implementation of it.
Ultimately, it is the return performance of these opportunity funds that determines how long this new strategy can survive under the existing GP platform.
3. Usually the same team, take out a small part of AUM, and make the first opportunity fund (there are exceptions).
The GP team usually has a “spiritual leader” who is responsible for finalizing new strategies and ensuring that the quality of all investments meets the standards.
Although the check size of this type of opportunity fund may be much larger than that of the core strategy, compared with a single-phase core fund, GP generally still raises a smaller fund to do it.
After the fundraising, investment management and retirement are mature, GP may formally establish a new team around this strategy, and then raise more funds.
4. Under normal circumstances, terms and fees are lower than core funds.
The management fees and carry of opportunity funds are usually relatively low, because core funds are like the most precious gems inlaid on the “crown” of each platform, and everyone mainly pays for this;
In the case of new strategies, it is often necessary to even a little bit of management fees and carry from the core funds to verify those new strategies used in opportunity funds.
5. In most cases, core funds are prioritized.
When there are new opportunities, how to allocate funds between the core fund and the opportunity fund must be clearly defined in the LPA and the scenario explained clearly. Both new and old LPs need to know which fund has priority for a certain type of investment, so that they can put money in more comfortably.
If the opportunity fund is a tool mainly used for follow-up investment, then the core fund may add a new valuation limit and investment capital limit. When the limit is triggered, the additional investment opportunities will be transferred to the opportunity fund and digested.
Most of these clauses depend on the judgment of the GP, but basically they will be consistent with the opinions of the LP.
The above is the basic structure of the opportunity fund. For more than a decade, opportunity funds have also derived different types from “early GPs to expand their investment range.” With reference to information from Top Tier Capital Partners, a VC fund of funds, we have further classified opportunity funds.
1. Select fund (select fund): to provide backup protection for the company’s existing portfolio’s follow-up investment; generally do not do lead investment + fixed valuation investment behavior, but in future rounds, exercise pro-rata rights The same proportion followed the vote. This can maximize returns when the reserve funds of several core funds are exhausted/insufficient.
One of the more successful models among all opportunity funds at present.
Basically concentrated in a few companies.
It is also an investment model that is currently very popular with LPGP. It is a lot of investment in early GP featured will raise funds for the same proportion with the cast to fill early on star fund the project had to be diluted vacancies.
2. growing fund (growth fund): funds set in a post does not belong to the existing portfolio companies; generally take the initiative in the late lead investor in the late rounds.
Although growth period investment is the core strategy of many companies, and it performs very well-when the early GP chooses to build a growth period opportunity fund, what usually happens behind it is that the GP has to vote for those early misses. , Or a case that can’t be invested in. Now in the growth period, if you understand it or negotiate it, you can invest in it.
3. Concentration fund (concentration fund): In the past, we generally called this kind of fund “parallel fund”. The concept of centralized betting funds is to create an additional capital pool to over-betting on the star projects of existing funds, while limiting the risk exposure of the core funds over allocating several assets. Often concentrate on betting that the foundation and core funds invest together .
For example, a company obtained a $30 million investment quota from a popular company in a round A fund, but this is too much for the core fund, so they may invest the extra part in a concentrated fund.
4. Sentinel fund (scout fund): An early fund that focused on providing deal flow for the core fund portfolio, generally a part of the core fund was allocated. But we have also seen some GPs use this type of strategy as a separate fund.
5. Leaders fund: Invest in very late-stage companies with the best financial performance, which may come from existing portfolios or external companies. The general target net return is 2-3 times, and the expected risk is relatively low.
6. Crossover fund: As the company goes public, the crossover fund conducts a round of private financing (pre-IPO) 6-9 months before applying for IPO. There has been a period of time in the past. This model is very popular in life science VCs. Attractive.
7. PIPE fund (PIPE fund): It is more common in life science VCs. PIPE (Private Investment in Public Equity) is a private investment in the stocks of listed companies. This strategy is based on GP’s unique view of the performance of listed companies.
8. Overflow/new ideas fund (overflow/new ideas fund): Grant funds to projects that are too risky or whose strategy is a little bit off the core fund. These strategies are to split the allocation of core risk funds, and GP will charge lower management fees for such funds to encourage LP and GP to take risks together. This kind of fund is not common in the VC system, because GP has already assumed considerable investment risk in the portfolio.
It is worth noting that the above-mentioned eight different types of subdivisions of opportunity funds may not be cited at the external PR level of some specific GPs.
This is because the positioning of some opportunity funds is deliberately vague. The GP itself cannot be completely sure of the projects that enter the opportunity fund, but it has enough confidence in its deal flow to allocate it to the specific types mentioned above. Generally, this kind of fund will be designed as SMA (Separately Managed Account). The situation may be that a relatively large existing LP wants to give more money to a GP, but if all the money is put into the core fund, the scale is not appropriate. .
#3 Opportunity funds can reduce GP’s dependence on certain deals
The main advantage of opportunity funds is to reduce risk, and early-stage funds no longer need to rely on certain deals. LPGP does not want its money to be placed in the same basket, nor does it invest all of its funds in one company or in a core fund.
Some GPs who are raising funds may hope to develop and expand the company’s team and recruit more people. Other GPs prefer to retain their original team, and the Opportunity Fund is still managed by the original core fund team. Some people think Opportunities Fund SPV more than accommodating and easy management science, because if you do SPV, in subsequent rounds, the need to tailor-made for each company for each round of financing, too much trouble.
In addition, one thing that is very important for GP is to have enough funds to catch the wind in time. A dedicated opportunity fund allows GPs to do this better, rather than having to do a lot of SPV in a short period of time. Opportunity funds can save the trouble of doing SPV for multiple companies. For early institutions with a limited team size, SPV may mean overwhelming management work, because GP needs to contact many LPs to do SPV. Opportunity funds provide a special pool of funds that can be invested, which is especially important in the current market where startups’ financing iteration speed is high.
We are stepping on an unusual point in time. At this moment, a large number of institutions are rapidly raising funds. In 2010, there were not many early GPs doing opportunity funds, and their impact on the overall ecology of growth fund investment was relatively small, especially when compared with the large funds and hedge funds that currently dominate the B round. Now, it is easier to raise an opportunity fund, because GP can now directly see which companies in the portforlio are doing well.
However, Opportunity Fund also has some voices of opposition. They believe that when the overall level of market valuation declines and economic growth slows down, opportunity funds will also lose room to play. Moreover, some institutional investors like GPs with rich experience, not a new fund that has just been established. In addition, many old-brand funds are rapidly acquiring and reorganizing, and they have not left much market for new funds. Therefore , the appearance of opportunity funds also allows new GPs to create their own soil in a narrow space.
Another point is that most entrepreneurs are more concerned about how to bridge the gap between the seed round to the A round of fundraising, and whether they can attract enough investors to participate in the A round of financing, rather than what their current investors are doing. Take out the money and continue to guarantee the right to pro-rata in the later stage.
Finally, not every GP needs the power of opportunity funds. Opportunity funds are of little significance to large venture capital institutions with $1 billion in funds, such as established institutions like NEA, whose core funds can already cover all projects from the seed stage to the growth stage .
However, the opportunity fund is not as fleeting as the “opportunity” in its name. It will be a long-term trend, allowing GP to invest more money and get more rewards for outstanding companies without changing the early strategy, so as to reap more fruitful fruits with LP.
As an opportunity to fund birthplace , the market is relatively common opportunistic US-based gold strategy portfolio is 75% Select Fund (select fund) with 25% Growth Fund (growth fund), in which most of the Opportunities Fund money, will be It is used as follow-up/follow-up investment of outstanding investee companies, and some of them will participate in growth projects that are beyond the range of GP’s own core funds, but have great confidence and confidence.
By the way, there is a very interesting phenomenon, that is, many of the emerging and early GPs mentioned above have begun to raise target growth and later opportunity funds. Generally speaking, LPs of existing early-stage funds are expected to support such funds. But after doing this, the LP’s “mixed risk exposure” (early stage + mid-to-late stage) on average goes to the later stage. The impact of this change on returns and the specific impact of the dynamic relationship between GPLPs is still needed. The test of time.