Co-investment – Invest with the best

One of the perks most widely associated with investing in venture capital funds is co-investment. In fact, some of our investors view co-investment as the most important factor when assessing funds.

But what is co-investment (often called co-invest), and what benefits does it bring to investors?

When a VC fund invests in a company, they typically secure preferential rights to invest in future fundraises (such as pre-emption rights). Say a fund invests £5m in a company’s Series A, this will likely mean that the fund has the right to invest an amount in that company’s Series B fundraise (e.g. £10m).

If the fund chooses to take up £5m of this £10m allocation, it can then pass on the other £5m of their allocation to its underlying investors (LPs). This is called co-investment. These LPs have the opportunity to invest alongside (co-invest with) the fund, into a Series B round that they would otherwise have no chance of accessing.

This is the appeal of co-investment. Investors who invest in top-tier funds can potentially invest directly into the more successful companies that these funds have backed, often alongside prestigious funds and private investors.

So, what are the full range of benefits investors can unlock through co-investing?

1. Diligenced opportunities

Most individual investors do not have access to the best opportunities, or the time to fully diligence those opportunities that they do have access to. Co-invest provides access to direct investment opportunities which may have been backed (often multiple times), and diligenced, by top funds.

2. Series B and beyond

The opportunities offered through co-investment are often in later stage companies, when funds have backed the portfolio company as much as their fund thesis allows. These may be from Series B, all the way through to pre-IPO investments, which individual investors often wouldn’t have access to.

3. Shorter time to liquidity

With co-investment opportunities often arising in companies at Series B and beyond, they are often on their way to profitability or a liquidity event. While a typical early stage venture capital fund has a lifecycle of 8-12 years, the timeframe for realisation of co-invest could be as little as 6 or 12 months, depending on the stage of the company when you invest.

4. Double down on opportunities that excite you

While you already have access to the returns from the fund, access to co-invest allows you to double down into companies that excite you, or align with your interests.

5. Fees (or lack thereof)

Co-investment is often used as a “hook” by funds to entice investment and therefore may have a different (lower) fee structure, with some purely charging for the structuring of any vehicle (although this varies from fund to fund).

At Sprout, we’re excited to offer co-investment opportunities from our funds to our investors. Sign up now to read more on our partner funds and the opportunities for co-investment.

Subject to eligibility. Capital at risk.