GenuineVC David Beisel's Perspective on Digital Change

December 17, 2012

Most first and second pitch meetings with VCs are fairly lopsided, where entrepreneurs spend the bulk of the time sharing their businesses, rather than being a true exchange of both parties in developing a relationship. However, there is typically (and should be plenty of) time for founders to ask VCs questions about their approach and working-style to help determine if there’s a mutual fit.

Somewhere in the past few years a meme developed that a sophisticated best-practice question to ask a VC in early conversations is something like “Where are you in your fund’s investment cycle?” The idea is that if a venture firm is towards the end of its capital availability that they’re much less likely to invest in a new startup, and that there are even cases of “walking dead” firms taking entrepreneur meetings to maintain the appearances of being “in market” with very little intentions (or ability) to invest at all. These situations are certainly prevalent and therefore entrepreneurs need to be cognizant to avoid spending too much time with a venture firm where the end result of the conversations isn’t going to be fruitful. However, it’s rare that a venture capitalist is going to point-blank admit that his pockets are empty. There are too many ways to answer the question above without really addressing the heart of the issue: the likelihood of making a new investment. Because most venture capital firms reserve the bulk of their capital for follow-on investments, and a smaller portion for initial investments, it’s not difficult to spin the numbers to tell a story since about how there is still a pool of capital available… except it’s earmarked for something else. Moreover, the situation is more nuanced – given that some firms at the tail end of their fund have confidence in the ability to (or have already been able to) raise a new fund, whereas others do not, being at the tail end of fund isn’t necessarily a bad thing. Or it can be especially negative if a firm changes its strategy toward the end (like investing in a number of seed round with about capacity for any follow-on). It just all depends.

A little simple homework can rule out asking the question altogether. Nearly all VC firms follow an initial three year initial investment cycle on a ten-year fund life (with the possibility of extensions). So if you’re meeting with a firm which has raised a new fund within the past three years, it’s pretty safe to say there is available capital for new investments. A simple Google search can usually yield an answer, and it surprises me how many entrepreneurs fail to do this before asking about the fund’s investment cycle in a meeting.

Once a venture fund’s life is entering the fourth year and beyond, the situation can change. In this case, the best way to determine future behavior is to look at recent behavior and use it as a proxy. The better question to ask is: “When was the most recent new investment your firm made which had the size & shape of the one which we’re seeking?” Often you can fund this information on the web (like on Crunchbase) anyway, but sometimes, and especially with seed investments from larger firms, not always. A venture firm has a tendency to slow down towards the end of its initial investing cycle, rather than coming to a sharp halt, so the longer since a recent investment of the same profile, the less likely the capacity and willingness to add another investment. It seems as though there’s always room at the end for potentially one more investment in a fund, so venture capitalists always like to keep the door open, and may feel given that fact it’s not disingenuous to do so. So in the end, the grey area of a fund’s initial investment period end is going to be opaque at best. It’s productive then for entrepreneurs to play detective to ensure that they don’t waste their time on conversations with firms without the capacity to invest, but also to be realistic about the clarity of the answer uncovered.

  • Joe Faris


    Great advice.  Very insightful.

    Another way of doing this is to go to the DE Secretary of Sate’s website and select “entity search” and then search for the name of the fund.  Remember, most VC firms have several funds – so ensure you get the suffix (“II”, IV”, etc.) correct.  For most funds, there may be an LLC and an LP. Click the  “LP” name and the next screen will give you the formation date.  

    If they also doing business in states like MA, they will have a foreign qualification and you can also go to the MA Secretary of State’s website and actually see a pdf of all of their Secretary of State filings.  DE does not give you access to the actual filings.

  • Seth Lieberman

    David-  Good comments- the one other trend I have seen lately (perhaps driven by current economic uncertainty) is that firms as they enter the last ~25% of capital in a fund are becoming more conservative.  Instead of just taking a couple more shots with their existing investment thesis they are looking for the last couple investments to be slightly further along and a bit more de-risked.

    • David Beisel

      Seth, over the past year or two, I seen a number of different actions of VC firms at the tail-end of their fund: becoming ultra-conservative, making a plethora of seed investments, completing secondary transactions, making a “bet” outside their primary thesis/domain expertise, etc.  Differing incentives and a perception that the last (couple) investment(s) can be an “exception” in the portfolio allows for all sorts of behaviors. 

      • Seth Lieberman

        Yes, I think that is right.  End of fund lifecycle manifests itself in lots of ways.

  • Eric Hjerpe


    Great insight. As you noted, many funds have been using a three year investment period where the fund can make investments in new portfolio companies, even though the fund documents typically stipulate up to a five year timeframe. Years ago, most VCs only had two main funds overlapping and being managed at the same time (a new fund raised at the end of the investment period of the old fund, in which only follow-on investments were being made). This means that only two funds were paying management fees, which as you know, pays the salaries and expenses of the staff.

    Now most VCs have three funds overlapping at any one time. Since VC investors are forcing a reduction in the size of VC funds, this is one way to increase the assets under management and maintain the fee stream in the face of smaller fund sizes. Unfortunately, this means more time by the VCs in fundraising and investor management, taking time away from investments.

    I would prefer going back to the 4 or 5 year investment cycle myself, and that is the target Jo and I try to shoot for in our funds…

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