Question

There is a potential conflict of interest if a Venture capital company manages multiple funds and each fund invests in a different series issued by the same company. The conflict arises because Fund X may invest in series A of company 1 and Fund Y may then invest in series B of company 1. If Fund Y places to high a pre-money value on the company it is essentially supporting investors in Fund X. The opposite is also a risk, if the pre-money valuation prior to the B series is set too low then the Venture Capital company is shifting value from Fund X investors to Fund Y investors.

TRUE OR FALSE

Answer 1

The above statement is true.

A private equity firm manages several funds, each of which may have its own set of investors. Each fund have their own objectives and goals depending on their clientele. Now, if various funds invest in the same company at different rounds of investing, overvaluation or undervaluation of the company (pre-money) shifts the wealth from one fund to another. A private equity may deliberately do so to bail out a fund or for other strategic reasons.