A key contribution by Sun Mountain Kegonsa will be risk management. SMK is a partnership of Kegonsa Capital Partners, a firm that has extensive experience managing Wisconsin-based start-up companies and Sun Mountain Capital which has deep experience managing geographically based Fund of Funds programs. Each Partner brings a complementary skill set to the risk management of the BFofF. SMK believes that investors making commitments to the (Badger Fund of Funds) will potentially experience two broad types of risk: risks associated with the uniqueness of the Money for Minnows investment strategy and risks associated with the asset class itself.
Investment Strategy Risk: In order to effectively mitigate the risk associated with the Money for Minnows investment strategy, SMK will utilize due diligence best practices for the evaluation of venture capital managers developed over years of investing experience. While SMK considers small and first-time funds an important element of the BFofF, greater emphasis and resources must be committed to the general partner due diligence process, since the establishment of track record attribution and an accurate assessment of appropriate risk controls will require greater investigation and examination than in the case of an established fund. Further, the SMK team will become voting participants on the investment committees of certain of the BFofF’s portfolio venture capital funds. In this way, SMK will act as guides and coaches to portfolio fund managers and provide input on due diligence, selection and structuring of portfolio investments. Lastly, the terms under which the BFofF will make investments in portfolio funds will not significantly vary from manager to manager and will involve industry standard documentation thereby reducing legal costs, time and uncertainty.
The implementation of the Money for Minnows investment strategy in Wisconsin is expected to change the emotional character of the Wisconsin venture investing ecosystem. A key component of the Money for Minnows investment strategy is making smaller dollar investments in more companies, thereby changing the entrepreneurial expectation of success. This strategy requires that the BFoF make investments in small sized but more numerous venture capital funds. SMK expects that the strategy will result in investments in venture funds that are geographically diverse and closer in proximity to entrepreneurial communities.
Asset Class Risk: Certain sub-asset classes of private equity pose greater strategy risk than others. Seed/early stage venture funds feature higher risk/higher return profiles than a typical later stage/growth equity strategy. Strategy risk is therefore best mitigated by diversification—sector, geographic and investment style. The BFofF will invest in a cross section of venture capital funds with each general partner having a different investment sector and geographic focus within Wisconsin as well as having varying investment styles and approaches to small company investing.