So then how have you dealt with the issues with the step-down approach you covered?
Another fair question. To take each of them in turn:
1. Protracting the deployment period. The VentureSouth sidecar funds are all set up to “trigger” automatically investment based on VentureSouth members’ activities. There’s effectively no way for the team to do any milking! Because of the automatic matching, we have invested these funds quickly: the investment period of fund I was 2.5 years; fund II, 2.2 years; fund III, 1.3 years. The fee on committed capital, therefore, was over months, not years, before stepping-down to the invested capital basis.
2. Raising too much and milking the fees. The VentureSouth sidecar funds are relatively small funds, compared to standalone VCs but more importantly compared to the investing power of the VentureSouth membership. Our problem is too many attractive companies and not enough capital to fund them, not the other way around!
3. Delaying write-offs. On this one, you really just have to trust the fund managers you invest with. Even though we have officially written off NONE of the companies in fund I, we’ve voluntarily reduced the management fee base on three portfolio companies that we think unlikely to return our capital. This is simply the right thing to do.
4. Fee gouging. We don’t do it. We cover all these unusual expenses (which there really aren’t that many of) out of the management fee. Our fund documents would allow us to charge these back to the fund, but paying them from the management fee where possible is simply the right thing to do. We work for carry.