While so much of the startup scene is funded by investment capital, it’s tough to know exactly where all of that money comes from. In chasing the power behind the investment throne it’s easy to believe that everything conspires by the hand of the Illuminati and leave it at that. As of today, Volition Capital’s Larry Cheng spells it out for us in perfect clarity. You may be indirectly pitching for your own money.
In a blog post entitled, “The Money Behind the Money”, Cheng explains that private equity investments generally come from a select few sources. While he offers a “Funds of Funds” category that invests on behalf of the below groups, because this category is an intermediary and is not a true source of capital, it’s safe to assume that the below three groups constitute the majority of investment capital in the country:
1. Wealthy Families: This funder behind the funders is not surprising. Cheng explains that single family trusts and foundations are the original investors in a number of firms including J.D. Rockefeller’s contributions to Venrock. In other words, your startup money moves from the affluent, to VCs and finally to you.
2. University Endowments: Alumni gifts play a huge roll in the investment landscape. When universities receive an alumni gift designated for endowment, that gift is often reinvested to raise additional funds and then used for school activities. Wikipedia has a fantastic list of U.S. universities ranked by endowment with Harvard, Yale, Stanford, Princeton and MIT at the top.
3. Pension Funds: Those family members that work in government agencies or major corporations and encourage you to pursue a career path with a pension and benefits might actually be enabling your startup dream. Explains Cheng, “A portion of these funds are often allocated to the private equity asset class. Major states investing in this asset class include New York, New Jersey, California and Oregon. Major corporations like AT&T and General Motors have also been active investors.”
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