I was chatting with one of our VC Fund co-investors the other day, mostly about how we might collaborate more closely given that we have already co-invested twice (in Idio and Volo Commerce). It was particularly fascinating that we have very similar investment interests with the key differences boiling down to the requirements of fund investing compared to syndicate investing.
The most fundamental difference between a Syndicate and a Fund is that a Syndicate has many diverse clients with a wide variety of investment appetites and portfolios; while a Fund manager refers to one investment mandate only, which can lead to different decisions in any given scenario.
I had meant to write about this for some time because I am often having to counter the assumption that we are only hoping that 1 or 2 out of 10 of our investments will drive high overall returns. While some Funds adopt this strategy, this is not how the Juno Syndicate operates, and I would argue it should never be the strategy of any Syndicate.
Another way of looking at this is for us to consider the conversations we have with our clients. Rarely if ever do they ask “How is my portfolio performing?”. They are, however, keen to hear about the progress of individual portfolio companies. They have favourites and those where they have invested more than others. While we provide the best available investment opportunities, they are ultimately responsible for their portfolio construction.
We base our investment decisions on the case for each investment. We cannot afford to take excessive risk with a particular investment, as this might form 50% of a clients’ portfolio with us.
A Fund has only one portfolio to consider. Its Limited Partners (investors in the Fund) are concerned with overall performance as they have only made one investment decision. They acknowledge that the Fund might take a series of smaller higher risk bets and back those that show the most promise with a larger share of the Fund’s resources (management and cash). This strategy is entirely rational – allocate resources where it will be most financially rewarding.
The starkest manifestation of this strategy is in biotech. A specialist biotech Fund will make a series of near binary investment bets (huge returns or bust) which are highly risky individually, but if well enough diversified in a Fund, the overall portfolio can have a satisfactory overall risk/reward ratio.
Here are some ways in which this difference shows itself:
The Fund size will dictate the minimum % a Fund needs to own in each portfolio company. As Syndicate investors, we are not constrained in this way.
A Fund is more likely to ‘abandon’ one of its portfolio companies if it feels that it can deploy its capital better elsewhere. There is unofficial competition between companies within a Fund’s portfolio for the follow-on money. Private clients are less likely to be so hard-heartedly rational and may follow an investment if there is still promise.
Time is money. Fund managers are rewarded for achieving a high internal rate of return (IRR). This consideration will dictate how they manage the timing and sequence of exits. Private investors have no master and so are more concerned with absolute returns from each of their investments.
All this is not intended to imply that private venture investors do not or should not be very mindful of how they build a portfolio. I’ll write another blog on that shortly. However, I hope that I have shown how the needs and demands of our clients drive the different investment decisions. Happily, despite these, we can more often than not align our interests and gain mutual benefit.
Has this piece raised further questions for you which I have not addressed? Do you see the distinctions differently? Are you interested in understanding more about how such diverse interests can collaborate effectively? Perhaps having read this you would like to attract investment from the Juno Syndicate. If so, please do leave a comment or contact me directly https://www.junocapital.co.uk/pages/edward-rudd