TLDR:
Key Points:
- Missing a capital call can have severe consequences for limited partners in venture capital funds.
- Consequences may include penalties, interest charges, forfeiture of previous contributions, and damage to reputation.
In a recent article by Financial Samurai, the author shared a personal experience of missing a $25,000 capital call from a venture capital fund due to an administrative error.
The article highlights the potential consequences of limited partners not meeting capital calls, which include:
- Capital Call Process: The issuance of capital calls by VC funds and the subsequent follow-ups if the funds are not received on time.
- Penalties and “Nuclear” Option: VC funds may impose interest or penalties, and in extreme cases, enforce clauses that result in the forfeiture of previous contributions.
- Reputation Damage: Consistently missing capital calls can harm a limited partner’s reputation and lead to exclusion from future investment opportunities.
- Reasons for Missing Capital Calls: Common reasons include administrative errors, liquidity issues, strategy changes, disputes, and operational delays.
- Limited Partner Defaults: Due to the severe penalties associated with missing capital calls, defaults by limited partners are rare but can result in the loss of entire investments.
- Investment Plans: The author plans to reduce investments in closed-end funds and focus on dollar-cost averaging into open-ended funds like Fundrise for liquidity and exposure to private growth companies.
The article concludes by emphasizing the importance of meeting capital calls on time in the competitive world of venture capital investments to preserve relationships, reputation, and future opportunities.
