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Exploring Evergreen Funds with a VC Investor Who Raised One

This post was written by Alex Graham, Finance Expert for Toptal.

Submitted by Michelle Young at Toptal

Edited by Lynn Patra

Executive Summary

What Are Open-ended and Evergreen Funds?
How Are These Funds Different from “Traditional” Funds?
What Is Some Advice from Someone Who Has Raised and Operated an Open-ended VC Fund?

 

Earlier in 2018, through Toptal, I worked with Rodrigo Sanchez Servitje from B37 Ventures on a project related to its open-ended VC fund. Such funds are still a relatively unknown and misunderstood type of funding vehicle, with a dearth of “in the trenches” information out there about how they operate. With this article, I am looking to correct that.

As someone who has raised and operated an open-ended VC fund, throughout the piece, I will refer to Rodrigo for invaluable insight regarding B37 Ventures’ experiences.

What Are Open-ended and Evergreen Funds?

In venture capital fundraising, as the adage goes, “If it ain’t broke, don’t fix it.” For years, funds have toed this line by raising capital through closed-ended vehicles. This refers to a management company raising a set amount from external investors via a limited partnership legal structure for a fixed number of years (typically ten). After this process, the doors close, money is put to work and, at the end date, the fund is wound up and repaid.

Despite investing in disruptive and innovative industries, the landscape of VC fund structures has largely remained unchanged.

The most obvious alternative would be the inverse of a closed-ended fund: an open-ended one. In these such funds, capital is invested directly into an LLC on an ongoing basis with no termination date. It is essentially investing preferred equity into a company. Investors buy units of a fund with a yield attached (the hurdle rate) and they can buy more, or sell, whenever they wish.

This type of fund is also liberally referred to as a permanent capital vehicle or evergreen fund. The ethos between the names is largely the same, in that it’s referring to structures with no end date or fixed capital quotas. A core distinction is that an evergreen fund can recycle returned capital while open-ended funds (like B37 Ventures) distribute to investors. Read more of this post

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