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Founders Fund Case Solution
Founders Fund is a San Francisco based Venture Capital Firm which is undergoing the decision of raising the second fund. The current scope of the fund revolves around developing it as an entity focused on innovation targeted at the mature industries and at the same time ensuring value for the investors and focusing on sustainable business operations. Founders Fund considered its approach to venture capital to be different from its competitors, because of the non traditional strategy it used to manage the venture capital as it targets the limited partners for raising a managed pool of funds and those partners are also preferred to have entrepreneurial background (Gifford, 1997).
Following questions are answered in this case study solution
Fund’s Strategy and Analysis
Assessment of drawbacks influencing traditional venture capital industry
Case Analysis for Founders Fund
2. Fund’s Strategy and Analysis
The Fund’s approach to Venture Capital concerned with the fact that they gave particular importance to the empowerment of the entrepreneurs and considered their presence to be crucial on the board in order to drive creativity and innovation that was necessary for leading the fund to a sustainable growth. As most firms were fine with having Venture Capitalists who had a financial and investment background but lacked experience of actually funding the companies, they fail to relate with the goals and ambitions of the founders. This is why FF focused on entrepreneurs working together with the investors, who themselves came from entrepreneurial background to realign the interests of both the parties. Hence, FF’s strategy revolved around empowering entrepreneurs so they can add a higher value to the organization and can be rated based on their capabilities and skills that would drive the businesses towards profitability and boost creativity and innovation for decision making.
Furthermore, as part of its strategy, FF also placed extra emphasis on ensuring board control as it discouraged giving all the investors a chance once to be on the board, due to the high risk of board being dominated by the outsiders. These people would have little knowledge about the operations of the business, hence reducing the potential creativity and risk taking ability of the organizations. By having the view that the venture capitalists focus on reaping large management fee whether significant returns were being generated or not also helps understand why FF considered this to be as means of reducing the innovation in the organization. Hence, FF focused on building strong relations with the entrepreneurs. It would target good investments at a lower price and create a culture where founders and partners would work collaboratively. The aim was not on targeting brand name firms but on having good partners with long lasting relations. In addition, the partners were encouraged to work side by side as entrepreneurs to enhance their entrepreneurial skills.
Hence, as analyzed above Founder Fund’s approach to the venture capital ensured sustainability by ensuring that the goals of the venture capitalists and the entrepreneurs are aligned with each other which would help in increasing the overall productivity and result in a higher level of innovation and creativity, which is the goal of all the venture capitals (Peneder, 2010). Another benefit of this strategy is that it would ensure the investments in high-risk startups and focus on developing a culture that would support the leadership traits of entrepreneur and encourage business activity rather than just focusing on the business profitability. However, there is a weakness of this strategy as it completely ignores the profit aspect of the venture capitalists. The funds for the second fund would be raised by high net worth individuals and institutional investors, who were previously targeted by mature venture capitalists. Hence, the returns expectation would be high which is not in line with the strategy of Founders Fund. Moreover, the idea of having limited partners on board with entrepreneurial background restricted the investor pool, which is one of the main reason why the Founder Funds is way behind its target goal of $150 million fund.
3. Assessment of drawbacks influencing traditional venture capital industry
FF can be seen to have identified four main challenges faced by the traditional venture capital firms, which include high competition among large funds to meet small financial needs, power balance shift towards entrepreneurs, less number of investors who were previously entrepreneurs and misaligned interests with the limited partners. FF’s assessment of the above drawbacks can be agreed upon to a certain extent. This is because it is indeed true that there has been a rising shift in the technological trends, which is why more and more investors are willing to invest in technological startups and entrepreneurial initiatives. This would obviously increase the amount of capital available for the venture capitalists to invest. It is quite evident that the availability of a larger pool of capital would diminish the returns to the investors, placing the segment in an unsustainable position.
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