In the first four posts in this series Nicholas and I have addressed big meaty questions – what is venture capital?, what exactly is an investor? and so on, which has been fun, but has been a bit like building a house before the foundations are down. This week I want to look at those foundations – asking the question ‘where do VCs get their money from?’The quintessential answer to this question is ‘institutional investors’ or ‘pension funds, insurance companies and endowments’. These are all examples of companies that manage huge pools of money which they invest for maximum risk weighted return. Generally speaking, they have a high level ‘asset allocation’ policy which splits their money across different types of investment with the major groups being equities (i.e. shares traded on public exchanges like NASDAQ or the LSE), fixed income (i.e. government and corporate debt), cash, and ‘alternative assets’ (which includes venture capital). The idea is that if you have a large pool of money under management you should have a mix of low risk-low return, medium risk-medium return and high risk-high return investments and alternative assets/venture capital is one of a small number of high risk-high return options. The allocation to alternative assets is typically 1-5% of the total, and the good news is that modern portfolio theory is pushing fund managers to increase their exposure to alternative assets and so this percentage is slowly rising.
To read the full, original article click on this link: Where do VCs get their money from? « The Equity Kicker
Author: Nic Brisbourne
