by Tasnia Huque, Senior Associate at Cue Ball
As a fund deploying permanent capital to entrepreneurs, we often get asked how an evergreen structure is different from the closed funds typical VCs invest from. This is a short intro primer that will highlight the core difference inherent in an evergreen fund (or said otherwise: a fund with a permanent pool of capital) as it relates to portfolio life spans.
The typical lifecycle of a closed investment fund can vary, but is typically within the range of 5 to 10 years. A fund investing in quickly maturing or relatively liquid investments such as marketable equity securities, or later stage private companies primed for the public markets, will prefer a shorter investment period. A fund investing in more slowly maturing or illiquid categories such as bio-technology, real estate or emerging growth companies will prefer a longer investment period. If we pick a closed fund with a term of 7 years, the first few years will be focused on making new investments with capital raised from Limited Partners (pensions, endowments, family offices, etc), the middle years into harvesting those portfolio companies (helping them grow with strategy, positioning, fundraising, hiring and so forth), and the last few liquidating those assets so returns can be allocated back to the LPs, alongside prepping for the next raise for Fund II. When these liquidations do not occur, the fund will typically decide to sell their stakes in portfolio companies in secondaries.
In an evergreen fund, there is no specific timeline as to when the capital raised is deployed and when that capital is recouped in the form of realized proceeds (aka the sale or IPO of your company). This characteristic makes raising capital from open funds particularly interesting for entrepreneurs who need a longer timeline to realize their vision, which can range from building a sustainable consumer brand to frontier technology platforms. For those entrepreneurs wanting to solve complex issues, create new markets, or just build a business that will take time to get to cash-flow positive, the flexibility of timing an evergreen fund provides might just be what the founders need. This is not to say evergreen funds are not supportive of exits, but rather the choice of the exit (both in its form and timing) is transferred from the LP requirements to the founder.
Overall, a summary of the benefits we see in an evergreen structure are:
• Long-term holding of the company, should it be financially more viable to enjoy dividend distributions compounded over time versus the one time exit value. This is essentially the model Berkshire Hathaway approaches their investments with, although of course not using venture as the entry point to pursue durable growth.
· To note: Management looking to take chips off the table can always consider selling their stake in secondaries, should they desire.
• Partnering with companies with modest year-over-year growth but still with outstanding value propositions that only compound over time, generating solid cash flow.
• Not leaving money on the table with a premature exit or mesh contrasting cultures with non-strategic mergers.
At Cue Ball, one of the core underlying hypothesis we are bought into is that building industry-transforming products take time and patience. More importantly, creating best-in-class cultures in companies that are beneficial to both stakeholders (employees, vendors, customers) and shareholders do not happen overnight. If you are a founder building a company that can stand the test of time, I would love to hear your long-term thesis. You can find me on twitter @tasniahuque or on email at email@example.com.