Major private capital infrastructure updates

Front Series C changes the game

This is the VC version of Chicago Pile 1, first Falcon 9 reuse, etc.

It’s absolutely critical for founders, operators, angels, VCs, researchers, service providers, etc. to understand what has occurred and its implications.

Traditionally a growth stage company (Series B to IPO) will raise funding from venture capitalists who themselves raise funding from high net worth individuals, family offices, funds of funds, endowments, pensions, sovereign wealth funds, etc. A VC firm will “lead” the round by negotiating a valuation, a board seat, and terms with the company along with how much of the round capital the lead will provide. Existing investors may exercise their pro rata (right to invest to maintain their existing ownership) and new investors will also participate.

In this case, Front’s Series C was led by a group of individuals who are founding CEOs of VC backed SaaS companies that have gone public.

This means that capital generated by Silicon Valley companies has been reinvested back into Silicon Valley companies without having to take the roundabout path of being distributed back to VCs, VCs to their LPs, raised by other VC funds from LPs, and then invested into a company.

A self sustaining chain reaction of growth stage capital has been achieved. And given that the primary goal of a VC investment is to see a return through an exit, who better to advise a growth stage company than a group of founding CEOs who have generated exceptional exits?

AngelList launches new Rolling Funds

Detailed overview: It seems AL creates a new Series Limited Partnership (fund) every quarter which new investors can commit to and that uninvested commitments from investors in the previous quarter roll over into the new fund. Essentially a VC raises 4 funds a year instead of the traditional one fund every 3 years. 12x more iterations. Combined with the ability to also seamlessly raise SPVs on a portfolio company by portfolio company basis, this new structure enables enormous flexibility.

I’m a little unclear as to how this works. Depending on the logistics, it could massively democratize VC fund investing.

A VC fund is generally limited to 99 accredited investors. It can choose to raise from more than 99 investors if it limits itself only to clients that are significantly wealthier than accredited investors. This is why VC funds tend to have high minimums ($250k for individuals) since they have a finite amount of LP slots. So if you are trying to raise a $20m fund, then your average check size has to be > ~$200k. A lot of first time managers will let friends/family/etc. come in at super low minimums ($5k-$10k) early in their raise and then dramatically raise the minimum investment size once they have found strong investor/limited partner fit.

If the AL Rolling Funds structure essentially has the GP become a GP of 4 new funds every year which invest in parallel, then theoretically, the GP now has 99*4*3 = 1,188 LP slots open every 3 years instead of 99. The number of LP spots in total would be less than 1,188 if existing LPs continually commit every quarter. Though it’s likely that some will not and spots will open up for new LPs. Either way, a GP can dramatically reduce minimums since they have more LP slots to work with.

This also gives fund managers a huge incentive to accelerate their content marketing and other brand building efforts since they can capture commitments far more frequently than before.

If demand allows, AL could offer this on a monthly or weekly basis in the future. GPs could launch 12 to 52 funds per year.

More funding for option exercise/private stock backed loan providers

Multiple new players are entering the space and scaling up. I’ve heard the rates on these loans are still super high and I have yet to see a term sheet from any of the providers despite attempting to solicit them on multiple occasions.

Vanguard entering private equity

No surprise here. There is an enormous amount of room to drive down fees in the private fund space.

  • Many PE, VC, and SPV funds (which severely underperform their own benchmarks as well as public market equivalents) charge 2% annual management fees and 20% carried interest. And often without a hurdle rate.

Very curious to see where Vanguard goes with this. I predict we’ll eventually see VC firms and SPV leads adopt hurdle rates (probably around 20-30% IRR) that they have to outperform before receiving carried interest.

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