Markets, resources and opportunities all change, and we have to change with them. Emerald pioneered a shift away from the ten-year fund model in 2016 with the recognition that different courses require different horses. We want to be a partner of choice for our clients—the large corporations that believe in our vision and the startups we support. This requires a rethink of artificial investment periods and rigid terms.
We feel particularly vindicated now that we see venerable Silicon Valley venture capital firm Sequoia Capital also taking this step with the announcement of its new, open-ended “Sequoia Fund”. Granted, our motivation was different than Sequoia’s: while Sequoia wants to stay invested in its portfolio companies longer, we want to give our limited partners more flexibility. But the result is the same: Sequoia joins Emerald in bringing innovation into the VC industry, which has otherwise been using “standard” structures without much change since the 1970s—ironically, given how much VC fund managers typically pride themselves on being “close” to innovation.
Emerald’s “flex-term” approach arose from a dual mandate: to maximize returns for our limited partners (LPs) and to promote sustainable and low-carbon technologies and business models. We recognize our LPs also care about fighting climate change, and this requires flexibility. Thankfully, our experience has been very positive. LPs can join at any point in time and remain in the fund as long as they wish, subject to a five-year minimum. It must be noted that this is not an open-ended fund like the one planned by Sequoia. Emerald’s structure is closed-ended like most other VC funds. But we refer to it as “flex-term” because it allows investors to have a flexible investment period—in contrast to the traditional fund structure where the investment period is fixed for all investors (usually at five years).
Twenty-eight limited partners from all over the world have by now embraced this idea and committed to the three available flex-term funds to date. A fourth flex-term fund is in the process of being closed. And the number of investors continues to grow rapidly, since the investment vehicles remain open indefinitely. This comes with several advantages for both Emerald and its investors:
● While LPs can join and leave at their discretion, our experience shows that investors want to remain engaged long-term. This stabilizes the fund and investment activity and makes them better able to support the innovations we’re all banking on to create a more sustainable future.
● With a growing and long-term asset base, investors benefit from a high team stability. There’s little risk of Emerald’s team falling apart every five years in the event of no follow-on fund.
● Fundraising is a lot smoother. Since the fund remains open indefinitely, investors can join when
ready and fund raising is therefore more regular and ongoing and not as erratic as with traditional fund managers.
Any limited partner can benefit from Emerald’s flex-term fund structure because it provides for
optionality, while strongly aligning interests between investors. We look forward to remaining at the
vanguard when the next wave of innovation hits this exciting space.