Viktoriya Tigipko is one of the most recognized names in the Eastern European VC community and is a native of Ukraine.
She runs TA Ventures, a pre-seed and seed stage VC, since 2010. Additionally she founded iClub (an angel network), WTech (a community for women in tech), and is Chair of the Board at the Ukrainian Startup Fund.
Guest Author: Viktoriya Tigipko
I’ve been investing in startups for a long time. Before officially starting TA Venture I’d already made 148 personal investments in startups starting from 2010.
And so I come from a heritage of having a lot of skin in the game. Because I was investing with 100% my own money.
It’s only later that I created a fund and started bringing in other LP’s (Limited Partners) to invest with me. And investing other people’s money felt very strange to me at first.
It felt like an even far greater responsibility than managing my own money. I didn’t want to let them down. I was going to do my absolute best to get my fund to perform well and secure for them good returns.
So even though my actual risk was lower (since I was now diversifying with others), I actually worked much harder on each investment.
Which brings me to my first point. I think it is very important that GP’s (General Partners) have significant skin in the game.
What does significant ‘skin in the game’ mean?
To me this means that the GP’s are putting a significant amount of their own money into the fund.
This is to ensure commitment, responsibility and alignment with their LP’s.
What you don’t want is GP’s that have very little skin in the game.
It’s a bit like if you were going to climb Mount Everest. You would probably want to find a good, experienced Sherpa who is going to climb with you.
You know that they are going to be right there risking their life next to you. And this aligns your interests very tightly.
Imagine instead you get a Sherpa who tells you that they’re only going to climb halfway but that they have a really great strategy for how to make it to the peak on your own.
You probably don’t wanna be climbing with that Sherpa 🙂
Why is this so important?
Well if GPs are primarily reliant on management fees rather than the fund’s performance for their compensation. This then leads to several potential pitfalls:
- Risk Aversion: The GPs, knowing they have little of their own money at stake, became overly conservative in their investment decisions, avoiding high-risk, high-reward opportunities that could have delivered significant returns.
- Lack of Engagement: With low personal investment, the GPs are less motivated to actively manage and support the portfolio companies. This results in several underperforming investments due to a lack of strategic guidance and support from the fund managers.
- Short-Term Focus: The GPs might focus more on securing quick exits to collect management fees and modest returns rather than building long-term value in portfolio companies.
So what is ‘significant’?
Well let me give an example of our commitment.
Our GP’s invest a minimum of 25% of the fund. This is a pretty significant commitment of our own money.
Compare this to the industry average of just 1 to 5%.
But with our investment thesis and to achieve the returns that we are targeting, we believe having this much skin in the game is actually critical to our business model.
Let me expand on this some more.
Why do we ensure we have so much skin in the game?
There are a few very important components for us.
First, the majority of of our LP’s are from Ukraine and emerging markets and are business owners.
Most of them bootstrapped their ventures because there wasn’t much venture capital available in places like Ukraine years back when they were building their business.
And so to these types of folks skin in the game is very important. Because that is how they built their own business. With their own money and own ‘skin in the game’.
Given that me and the founding team of TA Ventures are also from Ukraine, we very much understand this mindset.
Second, we invest in seed stage. These are companies that are very early in what will often end up being a very long life cycle.
With significant skin in the game it is as if you are tying your destinies together long-term. They might need your help years down the road and significant skin in the game ensures that you have the incentives to provide that help.
Lastly, we invest in both the US, Europe and emerging markets like SE Asia and Latin America. In these emerging markets there is often not a very long history of venture capital, so many of the successful founders bootstrapped their businesses.
Therefore when you are forming relationships with these founders you have far more credibility when you have significant skin in the game in your own fund.
Ask your GP how much skin they have in the game
If you’re considering being a LP in a fund than this should be one of the first questions you ask the GP’s… “How much are you, yourselves, investing?”
This is particularly true if it is a solo fund manager, which is a growing trend among small cap funds like ours ($25m – 50m). With these firms you’re putting a lot of faith in a single person, so it’s important that this person has significant skin in the game.
Let’s take a quick example of a fund size that is say $28 million. It is a very big difference when the GP’s have put in 25% ($7m) versus just say 1% ($280k).
Think about it… which fund manager would you trust more to manage your money?
This is particularly true now when the fund industry is generally rethinking its approach and major changes are happening.
Skin in the game poses an opportunity for fund managers to build more trust and credibility with their LP’s.
This is why we, at TA Ventures, take the stance of being at the high end of the industry and ensuring we have significant skin in the game.
