Notes

The Age of the Limited Owner

Unleashing a New Era in Venture Capital Investment

Welcome to "The Age of the Limited Owner," a transformative concept that is reshaping the very fabric of venture capital. In this article, we embark on an exploration of an investment strategy that defies conventions and unveils unparalleled opportunities.

In the realm of traditional venture capital, limited partners deploy their capital at the fund level, eagerly anticipating substantial returns over a fixed period but imagine an alternative— a world where investors acquire small ownership positions in top-tier venture capital firms, gaining access to the triumphs of multiple-funds without the need for individual fund investments.

This groundbreaking approach empowers “Limited Owners” to ride the waves of success across every active fund within the VC firm. Unlike limited partners, who tether their hopes to the performance of a single fund, Limited Owners become voyagers, navigating the collective momentum of the firm's entire portfolio. It's an exhilarating journey that offers flexibility, diversification, and the tantalizing potential for extraordinary returns.

Enterprising investors have already glimpsed the immense potential of the Limited Owner model. Consider the recent headlines made by Thrive Capital, a leading venture capital firm. With a bold move, they sold 3.3% of their firm for a staggering $175 million driving a $5.3 billion dollar valuation on the entire firm. This eye-popping deal not only showcases Thrive Capital's remarkable valuation but also underscores the transformative nature of this unique approach. It shatters the conventional belief that a VC firm's value lies solely in its assets under management (AUM), unveiling a more comprehensive and dynamic concept modeled by the Family of Firms (familyoffirms.com) — the Total Value of Firm or TVOF.

This revolutionary model also holds immense promise for corporates seeking to immerse themselves in the vibrant startup ecosystem. Instead of embarking on the arduous journey of building an in-house VC firm from scratch, corporates can leverage their corporate venture capital (CVC) arms to become Limited Owners. By acquiring stakes in established venture capital firms, they gain entry to the rich expertise, expansive networks, and collective triumphs of multiple funds. It's a strategic maneuver that positions corporates at the intersection of innovation, collaboration, and sustainable growth. Theoretically, they become indirect participants in the success of every startup investment across the firm’s portfolio and the firm’s carry across every fund.

Venture capital itself is a relatively young discipline, with a mere 76 years of existence. Cast your mind back to 1946 when a group of visionaries — including MIT president Karl Compton, Massachusetts Investors Trust chairman Merrill Griswold, Federal Reserve Bank of Boston president Ralph Flanders, and Harvard Business School professor General Georges F. Doriot — pioneered the modern VC era with the formation of American Research and Development Corporation (ARDC). Since then, venture capital has continued to evolve, and the Limited Owner model represents the latest chapter in this captivating story of capital and innovation.

The Age of the Limited Owner marks a thrilling paradigm shift that redefines the role of investors in the dynamic but fragmented world of venture capital. Embracing this revolutionary concept, we can paint vibrant strokes of innovation, forge powerful collaborations, and unlock unprecedented returns. As visionary firms continue to adopt the Limited Owner model, we stand on the precipice of an exciting new era. It's a realm where the collective success of the VC firm becomes the bedrock of a new type of investment opportunity.

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This article was penned by funder-founder Duránd F. Davis Jr., Managing General Partner and Chief Investment Officer of M&D Ventures for VC Reads, a blog from M&Dv.

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