Venture funds for the modern era

Share on facebook
Share on twitter
Share on linkedin
Share on email

Venture capital investors have underwritten massive transformations in technology, society and culture, yet there have been few changes to the investment process itself. While the structure of a venture capital firm has stood the test of time, the process of forming a VC fund has not. This antiquated process has been a barrier to entry for new voices in venture. Today, we are changing that.

Why venture capital funds work

In 1959, the first venture capital limited partnership was founded by a Major General, a US Ambassador, and the chair of RAND and the Ford Foundation. Draper, Gaither, & Anderson (DG&A) repurposed the limited partnership structure used by wealthy East Coast families for a new objective: to invest in burgeoning new technology in the West.

Today, the basic fund structure that DG&A utilized is the gold standard in venture capital. It has endured for good reason. The structure provides managers with stable income so they can build a career and it aligns incentives between GPs and LPs over the long term. 

With a fixed asset base and time period, each fund is a discrete financial product that LPs can use to reliably assess manager skill. This allows managers to establish a track record as they move up to larger and larger pools of LP capital.

The venture fund structure has enabled pension funds, sovereign wealth funds, and family offices to deploy capital into the most speculative projects in the world. VCs with audacious visions of the future can create a career for themselves by investing in those visions becoming reality. 

Ultimately, the venture capital fund structure has backed the Cambrian explosion in technology we have seen over the past 60 years. 

Why venture capital fund formations don’t work

While these massive advances in technology have unlocked and empowered a new wave of founders tackling increasingly complex problems, the VC industry itself has not undergone the same transformation. The process of forming a fund today would look very similar to the process used to form DG&A more than 60 years ago.

Ask almost any experienced manager from the past decades and they will tell you that the traditional approach to forming a venture capital fund is:

  • Expensive and time-consuming: Carta’s data shows the average fund costs more than $60,000 just to create. These costs accumulate before a single LP sends in capital and create a drag on returns from day one. Moreover, the average emerging manager spends 18 months trying to raise their first fund.
  • Disjointed and confusing: Few emerging managers have a background in fund structuring or back office operations, but they need to become quasi-experts in accounting, tax, legal, audit, and compliance. This results in an overwhelming number of engagements to negotiate and service providers to manage.
  • Manual and error-prone. Much of the process occurs over email, in manually updated documents, and hand-signed contracts. Sending data back and forth between systems can lead to errors in LP data and countless hours spent putting together the pieces.

Unlocking venture capital for a new generation of investors

The complexity of this process has become a high barrier to entry for diverse investors in venture, especially first time managers. The old approach blocks those without prior connections, as the only way to navigate the fund formation process is to be an industry insider. 

We are seeing a new wave of diverse founders tackling increasingly large challenges such as environmental change, healthcare access, and societal inequities. We need to empower the next generation of similarly diverse VC investors to close their funds and support these founders. 

Form your fund on Carta

Today, Carta is releasing a much overdue update to the venture capital fund with our Fund Formation offering. Creating a fund with Carta is streamlined, digital, and open to everyone. We handle the entire back office so emerging managers can focus on crafting and communicating their vision to potential investors.

Form the same time-tested fund structure in a much simpler way. We combine enterprise grade software and professional support from advisers with decades of experience for an end-to-end fund formation experience. 

With us, you’ll get:

  • Simple and efficient formations: We help you to form the fund entities, find a registered agent, and obtain a tax ID. Customize and send your legal docs digitally¹. 
  • Professional support at every step: Work with our pre-close advisory services team to guide your formation through your first capital call. Manage accounting and taxes with our experienced fund admin team and tax partners.
  • Seamless experience from formation to administration: We can seamlessly support your full fund lifecycle, from formation through fund administration. When you work with Carta for fund administration, your fund formation is included.*

Here is what we offer when you form your fund with Carta:

  • Entity formation⁵: We create your entire firm structure (Fund, GP entity, and Management Company) by using an API to file with Delaware.
  • Legal documents¹: Generate templated institutional grade legal documents and map your fund’s terms to Carta’s proprietary general ledger so your fund is pre-programmed with the right rules from the beginning. We provide standard LPAs, Operating Agreements, side letters and more, but can also support custom uploads. 
  • Bank account opening²: We manage the bank account opening process with our partner bank. If needed, we offer Capital Call Lines of Credit (CCLs) to make managing cash easy and simple .
  • Closing software: Close your fund seamlessly and make the LP onboarding process painless with our digital subscription documents process. LP information is saved so they never have to fill out the same form twice.
  • Investor Due Diligence: Carta can perform KYC/AML checks on your investors (as an additional service/for an additional cost) if needed.
  • Pre-close advisory: Work with our Pre-Close Services team for operational and advisory support on a weekly basis. They will be your guide to the entire process of creating your fund, from budget preparation to term sheet guidance. Our team has years of experience working with countless VC funds, large and small.
  • Vendor connections: All of the above pieces are flexible to work interoperably with other vendors. Your Pre-Close Advisor is an industry insider and can make introductions to banks, law firms, audit firms, and tax firms³.

Pre-Close offerings

Launch your fund the right way

Despite the spectacular pedigree of its founders, DG&A did not deliver spectacular returns. Yet, by pioneering the venture capital fund structure the firm made lasting contributions to the venture industry. 

In the end, what matters most in VC is not where you come from, but where you are going to take the world. Venture capital funds are the perfect medium for investors with unique perspectives to stake their careers on a vision of the future. Whatever your vision is, Carta can help you to make it a reality, one fund at a time. 

Interested? Get in touch with our team to spin up your fund.

 

*Amounts paid for fund formation services will be credited to your first year of fund admin fees, if purchased within 12 months.
¹ Carta’s legal documents are provided for your reference only and are not intended to serve as legal advice. We recommend that you consult an attorney licensed in the relevant jurisdiction as well as tax and financial professionals before finalizing your legal documents.
² Banking services are provided by Coastal Community Bank, Member FDIC.
³ Tax services are provided by Withum Smith+Brown, PC.
⁴ If requested, Carta will introduce you to or recommend preferred audit firms.
⁵ Entities are formed in the state of Delaware.
⁶ Carta offers CCLs through a strategic partnership with Coastal Community Bank (“Coastal”), a Member, FDIC. If you are approved for a CCL, Coastal will be your lender. Coastal’s obligation to provide a CCL to you will be subject to customary conditions, including but not limited to satisfactory completion of due diligence on you, your general partner and your LPs, there being no material adverse change in your business/financial condition, and receipt of final, executed loan documents.

DISCLOSURE: This communication is on behalf of eShares Inc., d/b/a Carta, Inc. (“Carta”). This communication is not to be construed as legal, financial, accounting or tax advice and is for informational purposes only. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.

 

All product names, logos, and brands are property of their respective owners in the U.S. and other countries, and are used for identification purposes only. Use of these names, logos, and brands does not imply affiliation or endorsement.

 

Related articles