Is Boutique an Advantage in Venture Capital?

Venture Capital: Are You In and Do You Have the Right Access?

Endowments with more than $1 billion in assets had an average allocation to venture capital of 13.4%, according to a 2021 study by Nacubo and TIAA. Family offices, investment advisors and their high net worth clients have struggled to get access to venture capital investing which may leave many investors underweight an asset class that has historically driven sizable returns.

2022.08 Fairway Is Boutique an Advantage in VC Chart 1.1

Access is a key factor in generating returns in venture capital. The challenge is not just to get into venture capital, but to get into the right funds within venture. The catch-22 is that the quality funds don’t need any more capital. The demand is often greater than the supply.

Fairway’s Founding Partners have invested with many of the quality private equity and venture capital firms in the world. Further, we have a structure that ensures our interests are truly aligned with our clients. Therefore, the team at Fairway believes access and alignment can live happily ever after — especially within a boutique framework.

Access to Sought-After VC Funds

One of the keys to success in venture capital investing is getting into quality funds. It’s simple, but that doesn’t mean it’s easy. Many investors know that who you invest with, which funds you are in, is key to return generation in VC/PE. That means lots of demand chasing a limited amount of supply. Translation: investors want quality funds, but quality funds don’t necessarily need new investors. It’s a supply demand imbalance. In fact, most of these VC funds are oversubscribed. They get their capital from current and previous investors. They don’t need new ones. So, these quality VC funds are capacity constrained. You can’t just walk up with a check and get an LP slot.

Having a pre-existing relationship with quality VC firms is often the only path into their funds. While some might say that puts a boutique at a disadvantage, we disagree. Our team members have relationships with many of the most well-known private equity and venture capital managers that have been developed over several decades. For example, Fairway’s Founding Partners worked together at Adams Street Partners, a large, global VC/PE firm, for 15+ years before starting our firm. The relationships we have at Fairway are carried forward from our many years in this business. We have access to firms like CRV, Battery Ventures and Bain Capital Ventures because our team members have invested with many of them for decades.

2022.08 Fairway Is Boutique an Advantage in VC Chart 2.2

 

Are Spin-outs the Future of Quality VC Shops?

While many quality VC funds are known and respected entities, we believe there’s another group with potential here. Breakaways. In addition to the pedigreed firms in the space, there is outsized return potential from investors who leave those firms to launch new funds. We refer to them as “spin-outs.”

While some of these situations can be very attractive, not many investors will have the relationships and experience to conduct effective due diligence on these opportunities. Due diligence on a new fund/fund sponsor isn’t just researching the fund itself but also the people running it. With a pulse on the VC / PE space for the last two decades, the Fairway team is often a preferred partner to invest in new funds.

To be clear, many of these newer funds or spin-outs are started by very experienced investors that have been working in some other capacity (typically as part of a more established fund, in an operating company or as an angel investor) prior to raising a fund on their own. We are active in the venture capital community, and we know how to effectively diligence these opportunities.


Alignment of Interest

In launching a boutique VC/PE firm, the founding team at Fairway not only wanted to provide better access to investors, we also wanted to create the best possible alignment with our clients. We believe true manager/client alignment can only exist when a manager’s compensation is directly tied to client results. We have structured our funds differently than most of our peers. Our fee schedules are designed to ensure that we are focused on helping to deliver attractive returns for our clients, rather than increasing assets under management. Our management fee is lower than is typical in our industry, and we place more emphasis on performance fees. We want our investment team to be incented to generate attractive performance, so their compensation is tied more to fund returns not AUM growth.

The Fairway team isn’t just managing the funds, our team members invest a significant portion of their net worth in our funds, right alongside our clients. This creates further alignment and reinforces the focus on investment returns.

The other important element in this performance-driven approach is fund size discipline. Venture capital as an asset class is not infinitely scalable. As we have seen the large amount of capital that has been raised and deployed in the last few years in venture capital, we are reminded of the importance of maintaining a modest fund size in order to keep the focus on funds that are capable of delivering attractive returns. This focus has led us to invest primarily in seed and early-stage funds. Many of these funds (in particular the newer funds and spin-outs referred to above) are looking to raise a smaller pool of capital. Because Fairway is also limiting the amount of AUM in our funds, allocations to these next-generation funds can be a meaningful percentage of Fairway’s portfolios. Larger amounts of capital inevitably lead investors to expand their funnel to include larger funds, more growth equity or ”pre-IPO” investments, etc. We feel strongly that these larger late-stage and growth equity funds are unlikely to deliver returns as strong as the best seed and early-stage funds going forward. We aren’t trying to be the biggest in the VC space, we are striving to be the best.

Success in Venture Capital: Access + Alignment           

Venture Capital investing has delivered very attractive returns for investors over the years. While we firmly believe venture capital can deliver attractive returns going forward, successful VC investing requires a thoughtful, disciplined approach. We believe the fundamental elements to building a successful venture capital program include:

  • Access to the best managers and companies
  • Fund size discipline
  • Alignment of interest

At Fairway, we have a team that has access to some of the most sought-after funds in the industry. In addition, our structure ensures that our focus is firmly on helping to deliver the best possible results for our clients.

At Fairway, we are playing to win. We want our investors to win and when they win, we win too.

 

Meet venture capital expert Kevin Callahan formerly of Adams Street Partners

 



Investors should carefully consider the investment objectives, risks, and charges and expenses of the Fund before investing. This and other important information about the Fund is contained in the Prospectus, which can be obtained at www.fairwaycapm.com. The Prospectus should be read carefully before investing. The Fund is distributed by Ultimus Fund Distributors, LLC. There is no affiliation between Ultimus Fund Distributors, LLC and Fairway Capital Management, LLC.

Important Risk Information
The Fund has been organized as a non-diversified, closed-end management investment company and designed primarily for long-term investors. Shares are speculative and illiquid securities involving substantial risk of loss. Investment in the Fund is not suitable for all investors. An investor should not invest in the Fund if the investor needs a liquid investment. Shares are not listed on any securities exchange and it is not anticipated that a secondary market for shares will develop. Shares are subject to substantial restrictions on transferability and resale and may not be transferred or resold except as permitted under the Agreement and Declaration of Trust. Although the Fund may offer to repurchase Shares from time to time, Shares will not be redeemable at a Shareholder’s option nor will they be exchangeable for shares of any other fund. As a result, an investor may not be able to sell or otherwise liquidate his or her Shares. Shares are appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment and for whom an investment in the Fund does not constitute a complete investment program.

The Fund is a “non-diversified” management investment company. Thus, there are no percentage limitations imposed by the 1940 Act on the Fund’s assets that may be invested, directly or indirectly, in the securities of any one issuer. Consequently, if one or more Fund Investments are allocated a relatively large percentage of the Fund’s assets, losses suffered by such Fund Investments could result in a higher reduction in the Fund’s capital than if such capital had been more proportionately allocated among a larger number of investments.

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The Fund Investments will include direct and indirect investments in various companies, ventures and businesses (“Portfolio Companies”). This may include Portfolio Companies in the early phases of development, which can be highly risky due to the lack of a significant operating history, fully developed product lines, experienced management, or a proven market for their products. The Fund Investments may also include Portfolio Companies that are in a state of distress or which have a poor record, and which are undergoing restructuring or changes in management, and there can be no assurances that such restructuring or changes will be successful. The management of such Portfolio Companies may depend on one or two key individuals, and the loss of the services of any of such individuals may adversely affect the performance of such Portfolio Companies. Some or all of the Portfolio Fund Managers (subject to applicable law) and the Fund may use options, swaps, futures contracts, forward agreements and other derivatives contracts. Transactions in derivative instruments present risks arising from the use of leverage (which increases the magnitude of losses), volatility, the possibility of default by a counterparty, and illiquidity. Use of derivative instruments for hedging or speculative purposes by the Fund or the Portfolio Fund Managers could present significant risks, including the risk of losses in excess of the amounts invested.

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In view of the risks noted above, the Fund should be considered a speculative investment and prospective investors should invest in the Fund only if they can sustain a complete loss of their investment. No guarantee or representation is made that the investment strategy of the Fund will be successful, that the various Portfolio Funds or Co-Investments selected will produce positive returns, or that the Fund will achieve its investment objective. Please see the Prospectus for additional risk information.

15409982- UFD 8/16/2022

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