Paraphrasing David Gardner, our north star is to build a portfolio that reflects our best vision for our future.
That vision is one where technology is a key component in improving daily lives, increasing access and building connections and communities. It’s a future where a focus on all stakeholders produces the best economic results, and where Foolishness is spread across the world.
We want a portfolio where the better it performs for us, the better it performs for all.
As a limited partner (LP), and more pointedly, as MOTLEY FOOL VENTURES (MFV) limited partner, you are on the doorstep of a unique journey.
In almost all venture funds, the LP’s provide the majority of the fuel (capital) to make the fund go. But with us, the opportunity will be larger than that. We believe our greatest strength, and our biggest differentiator is our members. In numbers, we will be 20X-50X the size of a typical fund’s LP population. Through this collective talent, expertise, perspective and commitment we intend to create a community of immense potential, and together we can build something truly special.
To ensure we are all properly prepared for the journey, we want to make sure you are aware of what is ahead, so that we can move forward together, with a common understanding of the risks, rewards, responsibilities and benefits of being a venture fund LP.
We’ve highlighted a few of the most important items below to draw your attention to the basics. If there is anything that isn’t clear after reading, please let us know. We want this to be an amazing experience, but that depends on us all understanding where we are going.
Part of our goal is to open up high quality, professionally-managed private company investing to a larger group. It may seem odd to talk about a lack of access, but the truth is that pretty much every well-known fund has a waiting list for LPs, and if you’re not an institution or family office willing to invest several million, there is rarely room for you at the table. At the extreme, Softbank Ventures is raising a fund where the minimum investment for a single LP is reported to be $250 million!
At a more terrestrial level, a typical venture fund has a minimum investment of $500,000 to $2 million, and is limited to 99 LPs. As we looked at the size of our membership, and the typical minimums, we wanted to do something different.
Investments in the Motley Fool Ventures Fund will be solicited in a
“506(c) offering,” and the fund will operate as a “3(c)(7) fund.”
That fancy jargon refers to securities laws and regulations. In short, a 506(c) offering permits us to do a general solicitation. We can speak about our offering to large audiences, and even do broad, general advertising in email, print, online, live, etc.
The 3(c)(7) exemption allows us to have up to 1,999 LPs in the fund, so long as they are all Qualified Purchasers. However, it also means that investors must have $5 million of investable assets to be an LP. $5 million is NOT the minimum to invest in the fund.
By taking these two steps, we will not need to register our Fund as a mutual fund, and will be able to offer our fund to a wide group and admit a large number of investors.
In order for us to meet the regulatory requirements, prospective investors will need to be both Accredited Investors and a Qualified Purchasers. The first requires a minimum income or net worth, and the latter a minimum level of investable assets.
Motley Fool Ventures will contract with a 3rd party firm, Verify Investor, to manage the investor qualification process. Verify Investor is the largest and most well-known provider of investor verification services.
Verify Investor will verify a prospective investor’s accredited status by either requesting and reviewing relevant information (tax returns, etc) or by having an attorney, accountant or financial advisor submit a letter certifying the Accredited Investor status. The prospective investor will also have to self-certify status as a Qualified Purchaser.
After qualifying, LPs begin the journey by making a Commitment to the fund. The commitment is the amount of money you are obligating yourself to invest in the fund over time. LP commitments are a serious matter, and defaults are not the norm. The LP agreement will spell out the steps that can be taken if an LP does not honor its commitment, which include expulsion and a forfeit of any funds previously invested. No money changes hand at the time of the commitment, but the commitment is a binding promise to invest, over time (3-7 years) the total amount committed.
Capital Calls are the mechanism used by the Managers to ask for a portion of an LP’s commitment.
Typically, Capital Calls can vary in timing and amount, at the discretion of the Managers. MFV will produce a schedule to help LP’s anticipate when a capital call will be made, and we anticipate that there will be 2-4 capital calls each year.
The exact amount of each Capital Call will still vary, but rough estimates are that 2% – 10% of the total commitment will be “called” at one time.
Three things will comprise the amount of the Capital Call:
- Management Fees. We will charge a fee of 1.5% – 2% (per year) to manage the fund, calculated off of the total Commitment. When there is a Capital Call, we will estimate the prorated amount of management fees that will be due before the next Capital Call, and include that in the current capital call. If we estimate that there will be 3 months before the next capital call, and your commitment was $200,000, the management fee apportioned to that commitment will be $750 – $1,000. Your individual investment including management fees will be repaid in full before MFV participate in any gains from the fund.
- Fund Expenses. The managers will pay, and then be reimbursed, for certain expenses related to the investments. These include fund administration, tax accounting, auditing and valuations, as well as other expenses related to investing in and managing the portfolio. Expenses will be reimbursed through capital calls, and we anticipate that those costs will be 0.20 – 0.40 basis points per year, or around ~$100.00 – $400.00 per capital call, based on that same $200,000 commitment. Fund expense are not repaid, and factor into the net investment return calculation.
- Investments. This is the money we invest directly into the companies. At each capital call, we will ask for enough to pay for any unfunded investments since the last capital call, PLUS an estimate of what we will invest up until the next capital call.
Combined, and for Illustration purposes, a $200,000 Commitment will result in a request for cash 2-4 time a year, at an all-in amount of $4,000 – $20,000 per call, until the full commitment has been paid into the fund.
It is the Manager’s responsibility to ensure the pace and amount of the capital calls is managed properly and effectively.
CARRIED INTEREST, or CARRY
At a high level, we are entering into an agreement to split profits 80/20, with 80% going to the LP’s and 20% going to the GP. But… profits must be earned before shared, and how (and when) we get to the point of sharing profits can vary from fund to fund.
We have chosen an approach that is common, and we believe fair-to-favorable to our LP’s:
As money comes back into the fund via the liquidation of investments, this is the order of distributions:
- The amount of capital that has been invested is repaid proportionally, until everyone has their capital returned (including management fees), then
- Any remaining proceed are split proportionally – 80% to the LP’s and 20% to the GP.
The net effect is that the LP gets back their gross commitment before the GP sees any profits. The Manager does have the right to withhold a portion of the distributions as a reserve or to reinvest.
LPs have a right to information about the fund, it’s performance and how capital has been spent and allocated. The Manager will provide regular reporting, most likely quarterly, that will keep LPs abreast of the fund’s performance.
The Managers will also ensure that LPs have the ability to view their specific account and details, and will contract with appropriate professionals to provide annual partnership tax returns (K-1’s) on a timely basis.
Early Stage, venture-backed private companies operate in an especially competitive environment, where they are in a constant battle against time, competitors and uncontrollable events to launch products, hire employees, acquire customers, woo investors and capture the attention of the media.
Most entrepreneurs are highly sensitive to proprietary information being leaked, and the thought of sharing detailed operating performance with 1,000-2,000 unknown “partners” can be daunting. If leaks were to occur, it would certainly be reputationally damaging, and would severely and negatively affect our ability to invest in any company that was not desperate.
To balance the needs of the portfolio companies, and desires to provide insights to our LP’s we will prepare quarterly summaries that largely aggregate otherwise publicly available information, and supplement it with “to be announced” updates. On a company-by-company basis, some non-public information may be approved for distribution. LP’s should not expect to receive financials on any company other than the fund. Even so, all information should be held in the strictest confidence.
We believe one of our greatest assets is our community of LPs. With your support and involvement, we will significantly increase the chances of maximizing the funds returns and impact. We will have opportunities for LP’s to assist us with sourcing potential new companies, evaluating markets, industries and competitive landscapes, and providing general and specific advice to companies.