The February issue of Venture Capital Journal (subscription required) has an article by Matthew Sheahan entitled "VCs try partnering for successful incubation." This article describes how VCs are pooling their capital to form incubators (or accelerators, if you will). The overall objective is to distribute the risk associated with seed investing across multiple funds. For instance, Accelerator Corp. is backed by Amgen, ARCH, MPM, and others to incubate biotechnology companies. The incubator is a separate corporate entity backed by VCs, who essentially act as the LPs in the incubator. The incubator retains some equity in the companies housed therein, while the VCs get first look rights. Another model is to pool capital from multiple VCs to form a seed fund, as is done with SAS Investors. In this case, there is no physical incubator (at least as I understand it). Rather, SAS identifies seed opportunities and makes investments as would another other VC, except the LPs are VCs.
Personally, I think this is brilliant. I would love to see the VCs in New York State pool their resources into a similar arrangement. It would not take that much capital, since these are seed investments, maybe $1-2 MM per firm x 3 firms. The incubator would not have to be a single physical incubator, but the "incubator" could be managed from a central location, while the investments are made wherever the technology is being developed, most likely at a University-associated incubator. Note that the "first look" agreement does not in any way obligate the fund from investing directly in the company when it is ready for a Series A. Essentially, a fund is having its cake (investing in seeds) and eating it too (passing before making a full commitment to the company).
Brilliant.
Now if I'm a limited partner in a fund which is investing in an incubator scheme, how would I feel about it? Would I have to change the LP agreement? Can a VC in an LP agreement turn around and become an LP? Maybe I'll send the author a note...I'll blog the response here, with his permission.
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