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Firms Not Funds: What Institutions Look for When Investing in Venture Capital 

With its long commitment periods and high volatility, venture capital is an asset class ideally suited to institutional investors. While it’s common to launch a venture firm with support from high-net-worth individuals and family offices, the vast majority of successful VCs are supported by institutional capital. What do these institutional investors look for when they invest in venture firms? And how can firms prepare themselves to be institutionally ready? With these questions in mind, the Pender Ventures team convened a panel with two of Canada’s leading institutional fund investors – Benoit Leroux from Investissement Quebec and Senia Rapisarda from HarbourVest – at this year’s Startupfest. Alison Nankivell from BDC also participated in the discussions leading up to the panel. Our conversations provided a useful roadmap for managers looking to build institutional relationships. In this post, we summarize some of the highlights.  

The key point that arose from all three panelists is that institutional investors are looking to build long-term partnerships. The nature of venture funds, with their 10-year+ life cycles, already suggests a long-term horizon. But institutions are rarely just looking to back a specific fund. Rather, they are looking to partner with firms that can execute an investment strategy across multiple funds in a variety of market conditions. As Benoit put it: “We are not indirect investors, we are direct investors into investment firms”. This long-term, partnership-oriented mindset provides a fundamental lense that institutional investors apply when evaluating venture firms. Building on that framework, our panelists highlighted four key areas that they look for when assessing venture firms.    

A Unique Insight

The starting point for any venture firm’s long-term vision should be a differentiated investment strategy that matches their team and market. Though they often bring other considerations to their investment decisions, institutional investors are looking for venture firms that can generate outsized returns. To convince institutions that they can generate those returns, venture investors need to explain their unique insight or advantage. For firms that are focused on a technological trend, it is important that they convey how the trend will remain relevant over an extended period. The same standard applies if the focus is an economic vertical or financing stage. Whatever their approach, firms also need to explain why their investment team is well positioned to deliver on their thesis.

Track Record

In making the case for their ability to drive returns, the most compelling data point for a venture firm is past track record. The ideal case for institutions is that the firm they are considering has already delivered cash returns in previous funds. While cash is king, in some cases strong paper returns are enough to get institutions over the line. This is especially true in Canada, where few firms have an extensive record of returning cash back to their investors. An investment team’s previous track record with other firms can also weigh heavily in decision making. The desire to back firms with proven track records is why many institutions shy away from emerging managers, preferring to wait until a firm’s third or fourth fund so that there is more data to assess. 

Back Office

While all investors seek returns, institutions also put a high value on a firm’s reporting and back office. Strong reporting is essential for institutions to compare performance across their venture portfolio, as well as the other asset classes in which they invest. Many fund investors also invest directly into companies in their venture portfolio; reporting is essential to bridging this gap. To satisfy the needs of their own internal operations, institutions also place a heavier weight on other aspects of a firm’s administration such as valuation policies, use of management fees and approach to calling capital. Naturally, firms with a track record of back-office execution have an advantage in this area of assessment. 


While institutional relationships are won based on thesis, track record, and administrative capacity, they are maintained by open and transparent communication. Great reporting provides the foundation, followed by well executed formal interactions such as advisory committees (LPACs) and annual general meetings (AGMs). Whenever possible, these meetings should be spaces for honest and open exchanges, including reflections on investments that are not performing. As Senia put it: “We understand that not every investment will go well. What we want to know is what is happening now, how you are triaging the portfolio, and what have you learned when things didn’t work out”. Beyond structured meetings, institutions like to be kept up to date as much as possible via ad hoc outreach. The worst-case scenario is when they hear about negative news in the portfolio secondhand, e.g. from the press or other co-investors. 

If the bar for raising institutional capital sounds high, this is exactly the point. While institutions are required to sustain most venture firms in the long run, they are not always an ideal starting point. In cases where emerging firms are not yet ready to check all of the institutional boxes, our panelists encouraged them to start building proof points with smaller and less demanding pools of capital. While this point is well taken, given the importance of institutional capital to the Canadian venture landscape, we also believe that it suggests an argument for more Canadian institutions to follow their American peers in creating formalized programs for backing emerging managers.  

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