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Editor’s note: NYC Venture Capitalist Mark Davis is authoring a four-part series on how a VC is funded. Davis notes the four methods are: diverse limited partners, family office, government or public capital. Today, Davis looks at the family office. The other three methods will follow throughout the week. Grab the feed to be immediately notified.

In my post, How A VC Is Funded, I listed four way in which VCs obtain capital to invest in startups. Each of these four sources of capital has slightly different implications for entrepreneurs. In this post, I will discuss the implications of a government funded VC.

Both the federal and local governments have created venture funds that seek to harness the free markets to achieve a social objective. The federal government has one fund that seeks to identify and incorporate new technologies into the military. Many state and city governments use these entities to stimulate local economies.

Capital Constraints
Similar to both the family office and public funded funds these funds recycle capital from one investment to the next. As a result, capital constraints can be an issue if they don’t have robust capital reserves are timely exits from other portfolio companies.

Furthermore, these funds are subject to the whims of legislators. It’s possible that your capital reserves could be re-appropriated to another state agency with a change of administration or policy.

Double Bottom Line
As aforementioned, these funds typically invest both to increase the size of their capital pool and achieve a social objective (e.g., supporting new technologies, creating tax revenue or decreasing unemployment). As a result, you should be thoughtful about the motivations of these VCs. A pre-requisite for their investment may require moving the company to a new location or taking the time to license the product to the government.

This column was provided by Mark Davis, the author of Get Venture, a column designed to help entrepreneurs raise venture capital. In addition to his column, Mark is active in the venture community as an entrepreneur, advisor and venture capitalist. He currently works at DFJ Gotham Ventures, a leading early-stage IT venture capital fund based in NYC. Mark is pursuing his MBA at Columbia Business School.

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This entry was posted on Friday, March 28th, 2008 at 11:43 am and is filed under venture capital, Insights, Mark Davis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.