Jan 2 2007 by Jason

What Is The Relevance of Life Terms of VC Funds?

Question:  I understand that each fund has a time limit (5 to 10 years). What are the dynamics of the funds? Does a fund nearing the end of its term tend to try getting as many exits as possible (at any price)? What happens with portfolio companies after the end of the fund’s term? Is it true that they turn worthless, even “thrown to the dogs?”
Or is it the opposite? Does a fund with money nearing the end of its life-term tend to become “easier” or even desperate to find deals?

Our Take: VC funds have finite terms of life. Generally, funds have 5 years to make investments in new companies and have an aggregate of 10 years to harvest the fund. In addition, most funds have a provision which allows the fund managers to unilaterally exercise 2 one-year options to extend the life of the fund if necessary to maximize investor returns. In other words, think about a fund having two “lives.” The first “life” is the period of time that the fund may invest in new companies. The second “life” the fund may operate to manage its current investments, including follow-on investments.

To specifically answer your questions, a fund nearing the end of its life (10 to 12 years) will try to liquidate its investments in order to return value to its investors. After the fund hits its termination period, it must shut down and either distribute cash or securities to its investors. If the company is private, distributing securities is not feasible; therefore one does see VCs selling the fund assets. This isn’t a fire sale – there are plenty of professional buyers out in the market that purchase these types of assets. That being said, if the company is successful, the fund will have sold out too soon.

With respect to the first life, if the fund has excess cash and is getting near its 5 year cut off for making new investments, we have seen cases where the cash flows a bit looser out the door. Most reputable VCs, however have pretty good control over their cash available for new investments and plenty of deal flow, so normally we don’t see a rush to spend before the time period expires.