What it Means to Raise Capital From an Evergreen Fund

1. 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. This is also an emerging trend as we see more and more companies deciding to remain private for the long-term.

2. To note: Management looking to take chips off the table can always consider selling their stake in secondaries, should they desire.  

3. Partnering with companies with modest year-over-year growth but still with outstanding value propositions that only compound over time, generating solid cash flow. This is helpful for those with self-awareness that growth does not need to come at all costs.

4. Not leaving money on the table with a premature exit because of an arbitrary forced fund lifecycle timeline or mesh contrasting cultures with non-strategic mergers.Some challenges (more skewed towards the VC versus the entrepreneur’s perspective):

5. It is typical to de-risk an investment with other parties co-investing. It is important to ensure the company, board, and full set of investors are aligned with the evergreen value proposition and company trajectory timeline.

6. From the VC side, raising capital from institutional LPs for an evergreen fund tends to be quite difficult. This is because asset allocators are used to specific timelines for receiving distributions (profits on exit of companies), rather than carved out portfolio specific distributions if and when a company is sold or periodic redemptions based on fair value of the portfolio (versus actual realized proceeds). At steady state, however, the hope is for the evergreen fund to eliminate the need to continuously fundraise by re-investing portfolio exit profits or dividends back into the fund.

7. Also from the VC side, tax and ownership in the fund changes frequently as the fund and portfolio value grows over time, resulting in higher monitoring and reporting needs. As founders decide to raise capital, it is incumbent on them to best understand the underlying incentives in both closed and open funds. The structural motivations driving how a fund operates can have a significant impact on the founder’s overall company strategy, for both growth and exit. While there are many instances when closed funds offer the best alternative to entrepreneurs (depending on their goals and time horizon), it is important to internalize which motivations are being realized.  I am hopeful the above gives both aspiring founders and VCs at HBS an important factor to include in the decision-matrix of choosing a fund.