Author： Helen Wang
We all know that fund-raising is difficult to an extent that some GP turning to everyone in their sight, one GP even dropped to his knees. But is it enough for GP to raise funds and even if it did, is GP guaranteed to sleep safe and sound?
Today, GPLP would tell a true story.
This is a true story. Ten years ago, two almost identical GP companies were created. Their background was both the US dollar fund. The investment direction is the same. The background of the founders is almost the same. But the starting point of A is higher than B, whose LP came from a family fund that is especially well-known abroad.
However, after ten years, what is the outcome of the two?
A is so desperate and crazy to get money that he even drives people away.
When it comes to B, LPs turn to him on their own initiative. And B fund doesn’t promote that much. Coz after ten years, the performance and capability say for themselves.
How did such a gap generated?
Story of GP
If we want to explore the secrets of life and death of a GP, we should return to the origin of the GP and take a look of the GP’s story.
Investors seem to be a fancy position in China. In the past, it is true that almost every practitioners had background of studying abroad. In short, everyone was squeezing in, like the Goldman Sachs, it took various networking and then a variety of exams to join.
According to the data, in 2017 Goldman Sachs only recruited 7 Chinese students, but received 250,000 resumes of students! The fierce competition can be imagined.
In order to finally get the recognition of these investment banks, each of the competitors has to go through multiple rounds of interviews and then finally enter the candidate stage. At this stage, each candidate has three rounds of 30-minute interviews, usually hosted by two investment bank executives. This means that in Superday alone, you will meet with six VP and MD level investment bankers.
Of course this is just a surface phenomenon.
This is just the tip of the iceberg. There are also various relationships – according to Hong Kong’s “South China Morning Post” report, after Morgan Stanley was hired to investigate the employment of high-ranking children and relatives, Wall Street investment banks Goldman Sachs, Deutsche Bank, Morgan Stanley, Citigroup and Credit Suisse also received US Investigation by the Securities and Exchange Commission (SEC). The move may expose the disgraceful side of the relationship between Wall Street banks and the children of officials.
The New York Times reported that the SEC obtained relevant confidential documents from the “Officials second generation recruitment” from JP Morgan Chase. The e-forms and e-mails in the document show that JP Morgan Chase first set up a project to ban such “second-generation recruitment”, but ultimately regarded it as a stepping stone to do business with state-owned enterprises, which generally issue shares through Wall Street’s investment banks. .
All in all, once, working as GP is a very glorious thing. However, with the increase of GPs, this thing has become more and more common. Everyone can raise a little money and then recruit several investment managers. Just how simple investment was.
But is this really the case?
Like any entrepreneurial process, being a GP is actually a journey of entrepreneurship, and it is more difficult than normal entrepreneurship.
For example, in other entrepreneurial processes, a person, regardless of whether the fundraising is in place, can start his or her business in the garage. Then, with the advent of the product, it can be sold and generated income. However, differently, first of all, GP just needs to raise funds. Of course, the premise of fund-raising is that you have to pay a large part of it. The threshold for entry is very high. Otherwise, who do others have to hand over the money to you? The interests must be consistent.
Secondly, if you have money, you gotta invest. Investment is a very professional thing involving all walks of life. Therefore, GP must have a partner to help, otherwise all these raising and investing would wear him or her out, even if this GP is a superman.
GP’s investing is not the end, GP has to participate in post-investment management, it is a lot of troublesome things, for example, recruitment, the company internal quarrel, the major shareholder and the second want have to be separated, all looking for GP to complaint.
Wait, this is not the end.
Even if these companies grow up and successfully raise the funds, then GP is only prosperous and wealthy on the account.
Why is that?
It is because they cannot get the cash, it’s like no reduction within half a year after listing, so your shares don’t really deliver much benefits.
Tossing and turning, after three or five years have passed, GP not only did not make much money, but also wasted a lot of money themselves. So many GPs couldn’t handle and change their jobs.
GPLP saw a few GPs transferred to be entrepreneurs. Before being a GP, they were billionaires. The days they spent were more chic and comfortable. However, after less than three years, these GPs all complained that the money has not been earned, the valuation has been turned over several times, but the valuation is not cash, which is of no use.
Of course, some GPs lead a more miserable life and even borrow money from others, not to mention the investment managers, investment directors and other people, whose appearances are very fascinating and lives bitter.
After a few rounds, it turns out that being a GP is even harder than entrepreneurship, which is way harder than investing in who shouts the loudest.
Why there is such a difference between A and B fund regarding those GP’s business?
The boss of the A fund is naturally more comfortable but wasted a good starting point. In the following ten years, the investment decision was so slow, and the post-investment management was basically zero. Almost no good projects have been invested during the ten years, and the majority of personnel have resigned, how can their fund-raising not be difficult? Even it is the well-known fund in the circle, having their own propaganda every time, and have invested hundreds of thousands of dollars in propaganda, but the people who really know their actual situation are hiding from them. If it were you, do you dare to invest?
It is a universal rule that VC is a game of insiders. Those outside the industry are basically reshuffling.
B fund is totally opposite from A.
They do not say much, but the investment decision is very fast, and the work is very professional. Those original personnel are still in the company, which is quite shocking, their performance, needless to say, are pleasantly amazing.
LP is doubtlessly not stupid, who would want their jobs lost or unstable?
Survival only by raising funds?
Even if they raised funds by all means even through their family background, is it enough for GP to survive?
NO，NO，NO。
People who think so couldn’t be more wrong.
Such a challenging and hard position requires much more than just fund-raising.
According to the US definition of venture capital:
VC originated in the United States after the Second World War and is a partnership model that promotes private equity financing for new companies in a unique way: limited partners (LP) invest in VC funds created by VC’s general partner (GP). LP must wait patiently for up to 10-12 years to recover their funds and hope to get a good profit.
The operating mode of VC is:
In the first or second years of the VC’s establishment, GP took out the LP guarantees and invested in promising new companies, and then tried to guide these companies to success. Funds range in size from tens of millions of dollars to hundreds of millions of dollars or more, depending on whether the fund is focused on investing in seed and early companies or in late-stage companies and M&A investments that require large capital. Of course, LPs generally do not give their money to a VC company that has no performance to prove that GP is a successful entrepreneur or a successful VC investor. Therefore, for entrepreneurs or VC investors who have no great performance, it is very difficult to establish a VC company.
Usually, a VC company has 5 to 8 GPs. In addition to the NET share of successful investment (known as Carry, generally 20%), GP generally receives 2% of VC funds as management fees each year. For example, for a $100 million fund, the GP will charge $2 million a year as a management fee. If some companies invested by GP eventually withdraw through IPO or mergers and acquisitions, for example, when the value of the fund increases to 500 million US dollars, then the fund’s income is 400 million US dollars (500 million US dollars minus 100 million US dollars of investment costs) ). GP will receive 20% of this proceeds as Carry ($400 million * 0.2 = $80 million) and the remaining $320 million will be used as LP’s profit, which has removed and returned $100 million they had previously invested in the fund. .
Clearly, fund-raising is only the beginning.
After raising the fund, for the management fee, a GP needs to provide the following services:
1. Attract and find promising companies and entrepreneurs;
2. Invest in them at a reasonable price;
3. Recruiting the suitable talent for these portfolio companies;
4. To supervise and counsel the management of the invested company by participating in the board of directors of the invested company to help them grow;
5. Withdrawal by the way of IPO or corporate mergers and acquisitions to achieve revenue.
Of course, after so many years of development in the VC industry, the first echelon and the second echelon or the third echelon have long been formed.
According to US statistics, about two-thirds of VC’s first fund is also the last fund. Only 10% of the 2,917 VC companies in the US SPS database have issued more than four funds.
Therefore, even if the funds are raised, GP still needs to continue to work hard. Otherwise, many GPs will swindle the management fees at most, and have a comfortable life for several years. Once the fund perform poorly, it is basically doomed.
Simply put, GP is like donkey, who eats coarse grass, toils in obscurity and often have to endure the tossing and turning.
Good investment makes everyone happy, while once they make a bad choice, welcome to the evening meetings and discuss with entrepreneurs about how to survive, or who will pick up the next round of financing?
Pride belongs to entrepreneurs. Even if it is listed, it is entrepreneurs who will be successful, investors will earn an investment premium at most, and when it is time to withdraw, the company has nothing to do with GP.
But once they fail, LP would scold GP badly about their bad judgement and capability.
In a word, venture capital is a gambling. Some people may make a profit of 1,000 times in 30 years. In the end, the reason we actually let him succeed is because he is a lucky duck and more investment. In the end, the master may be bankrupt or at least near the edge of bankruptcy. Yes, this is a naked reality. The probability is omnipresent. One hundred millionth of the chances are zero, sometimes it will return to zero, so no matter how much you feel, You are just a person. If you taking the plane, who knows which plane is wrecked, and whether you are on the plane or not.
GP is a dead end, stay away from it and you shall be fine.
