Venture Capital: Are You In and Do You Have the Right Access?

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Endowments with more than $1 billion in assets had an average allocation to venture capital of 13.4%, according to a study by Nacubo and TIAA. Family offices, investment advisors, and their high-net-worth clients have struggled to get access to venture capital investing which may leave many investors underweight an asset class that has historically driven sizable returns.

Access is a key factor in generating returns in venture capital. The challenge is not just to get into venture capital, but to get into the right funds within venture. The catch-22 is that the quality funds don’t need any more capital. The demand is often greater than the supply.

Fairway’s Founding Partners have invested with many of the largest private equity and venture capital firms in the world. Further, we have a structure that ensures our interests are truly aligned with our clients. Therefore, the team at Fairway believes access and alignment can live happily ever after – especially within a boutique framework.

Access to the Most Sought-After VC Funds

One of the keys to success in venture capital investing is getting into quality funds. It’s simple, but that doesn’t mean it’s easy. Many investors know that who you invest with, which funds you are in, is key to return generation in VC/PE. That means lots of demand chasing a limited amount of supply. Translation: investors want quality funds, but quality funds don’t necessarily need new investors. It’s a supply-demand imbalance. In fact, most of these VC funds are oversubscribed. They get their capital from current and previous investors. They don’t need new ones. So, these quality VC funds are capacity constrained. You can’t just walk up with a check and get an LP slot.

Having a pre-existing relationship with quality VC firms is often the only path into their funds. While some might say that puts a boutique at a disadvantage, we disagree. Our team members have relationships with many of the most well-known private equity and venture capital managers that have been developed over several decades. For example, Fairway’s Founding Partners worked together at Adams Street Partners, a large, global VC/PE firm, for 15+ years before starting our firm. The relationships we have at Fairway are carried forward from our many years in this business. We have access to firms like CRV, Battery Ventures and Bain Capital Ventures because our team members have invested with many of them for decades.

Are Spin-outs the Future of Quality VC Shops?

While many quality VC funds are known and respected entities, we believe there’s another group with potential here. Breakaways. In addition to the pedigreed firms in the space, there is outsized return potential from investors who leave those firms to launch new funds. We refer to them as “spin-outs.”

While some of these situations can be very attractive, not many investors will have the relationships and experience to conduct effective due diligence on these opportunities. Due diligence on a new fund/fund sponsor isn’t just researching the fund itself but also the people running it. With a pulse on the VC / PE space for the last two decades, the Fairway team is often a preferred partner to invest in new funds.

To be clear, many of these newer funds or spin-outs are started by very experienced investors that have been working in some other capacity (typically as part of a more established fund, in an operating company or as an angel investor) prior to raising a fund on their own. We are active in the venture capital community, and we know how to effectively diligence these opportunities.

Alignment of Interest

In launching a boutique VC/PE firm, the founding team at Fairway not only wanted to provide better access to investors, we also wanted to create the best possible alignment with our clients. We believe true manager/client alignment can only exist when a manager’s compensation is directly tied to client results. We have structured our funds differently than most of our peers. Our fee schedules are designed to ensure that we are focused on helping to deliver attractive returns for our clients, rather than increasing assets under management. Our management fee is lower than is typical in our industry, and we place more emphasis on performance fees. We want our investment team to be incented to generate attractive performance, so their compensation is tied more to fund returns not AUM growth.

The Fairway team isn’t just managing the funds, our team members invest a significant portion of their net worth in our funds, right alongside our clients. This creates further alignment and reinforces the focus on investment returns.

The other important element in this performance-driven approach is fund size discipline. Venture capital as an asset class is not infinitely scalable. As we have seen the large amount of capital that has been raised and deployed in the last few years in venture capital, we are reminded of the importance of maintaining a modest fund size in order to keep the focus on funds that are capable of delivering attractive returns. This focus has led us to invest primarily in seed and early-stage funds. Many of these funds (in particular the newer funds and spin-outs referred to above) are looking to raise a smaller pool of capital. Because Fairway is also limiting the amount of AUM in our funds, allocations to these next-generation funds can be a meaningful percentage of Fairway’s portfolios. Larger amounts of capital inevitably lead investors to expand their funnel to include larger funds, more growth equity or ”pre-IPO” investments, etc. We feel strongly that these larger late-stage and growth equity funds are unlikely to deliver returns as strong as the best seed and early-stage funds going forward. We aren’t trying to be the biggest in the VC space, we are striving to be the best.

Success in Venture Capital: Access + Alignment                

Venture Capital investing has delivered very attractive returns for investors over the years. While we firmly believe venture capital can deliver attractive returns going forward, successful VC investing requires a thoughtful, disciplined approach. We believe the fundamental elements to building a successful venture capital program include:

• Access to the best managers and companies
• Fund size discipline
• Alignment of interest

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