TLDR:
- VC firms do not have immediate access to all funds when closing a new fund.
- Capital call lines of credit help VCs manage cash flow and collect commitments from LPs.
When a venture capital (VC) firm closes a new fund, it does not mean that they have instant access to all the funds. The fundraising process involves commitments from limited partners (LPs) that are injected over the fund’s life. VCs call capital from LPs as needed for cash flow requirements like new investments or follow-on funding. However, delays or rescinded wires from LPs can result in liquidity problems in the venture capital ecosystem.
A capital call line of credit, also known as a capital call facility, is a specialized debt instrument that helps VCs manage cash flow and collect commitments from LPs more efficiently. This line of credit allows funds to access a percentage of uncalled capital in the fund, with payback periods ranging from 90 to 365 days.
Capital call lines benefit VCs by improving operational efficiency, cash flow management, and reputation. Efficiently managing capital calls reduces administrative burdens and ensures timely deposits for portfolio companies, ultimately leading to better reputation management in the industry.
Aside from providing liquidity to VCs and the innovation ecosystem, capital call facilities can also help build relationships with banks, potentially leading to easier access to debt capital and other financial solutions for portfolio companies. Overall, high VC liquidity is crucial for enabling the scaling potential of portfolio companies and fostering innovation in Canada’s economy.
