DEFINITION of 'Pledge Fund'

A pledge fund is a special type of investment platform in which members work toward a specific investment goal by making defined contributions in a pool over a period of time. Many angel investors have started to employ a pledge fund format in venture capital investing.

BREAKING DOWN 'Pledge Fund'

After the dotcom bubble, venture capitalists became more concerned about the startup companies that they would finance. Many venture capitalists decided to set up pledge fund-style angel investor clubs instead of following the conventional format that was popularized in the 1990s. This was largely because using a pledge fund format would not force individual angel investors to invest in ventures that the majority of the group decided on, but would allow each member to elect whether to take part in an investment opportunity on a case-by-case basis. This method was well received by investors who were skittish about startup investments after the dotcom bubble had burst.

How a Pledge Fund Operates

Pledge funds can be launched to pursue investment opportunities across a multitude of industries and business sectors, including the real estate and energy markets. The concept is not limited to backing startups. Due to the nature of a pledge fund, wherein investments are made on a per-deal basis, members may find it easier to raise funds, compared with other types of investment platforms.

The format and structure of a pledge fund can still resemble a conventional private equity fund to a certain degree. Cash is contributed to a special purpose vehicle, and in turn shares are purchased per the deal. Investors may also be called upon to pay certain operating expenses. However, there is a considerable amount of greater control over how and where deals are made. A pledge fund offers even more assertive control over deals when compared with a blind investment pool, which takes funding from investors but without a stated objective for the deals that will be made.

There are potential drawbacks to a pledge fund and its limited partnership structure. For instance, more time may be needed to assess and screen investment opportunities, which is counterproductive to the opportunist nature of a pledge fund. It may also be harder in some cases to bring on third-party co-investors for a given deal.

The target of the investment might not be as receptive to a pledge fund and could instead opt for traditional, committed equity. Furthermore, committed equity deals might close more immediately than a pledge fund.

RELATED TERMS
  1. Net Revenue Pledge

    A net revenue pledge requires the issuing municipality of a municipal ...
  2. Venture Capital

    Venture Capital is money provided by investors to startup firms ...
  3. General Obligation Bond - GO

    A general obligation bond is backed by the credit and "taxing ...
  4. Committed Capital

    Committed capital is a contractual agreement that obligates an ...
  5. Pooled Funds

    Pooled funds aggregate capital from a number of investors, as ...
  6. Fund

    A fund is a source of money that is allocated for a specific ...
Related Articles
  1. Managing Wealth

    Billionaires Who Haven't Taken The Pledge

    The Pledge has gained a lot of attention, but some names are missing. We'll look at a few notables not signing up.
  2. Tech

    The Risk And Rewards Of Investing In Startups (GOOG)

    Investing in startups is a very risky business but can reward investors greatly if and when they do pay off.
  3. Small Business

    Fed Raising Rates Affects Startup Funding

    With interest rates having nowhere else to go but up, the Fed’s impending interest rate raise will likely begin to reverse the flow of startup funding.
  4. Small Business

    Angel Investing vs. Crowdfunding: How to Raise Money for Your Startup?

    Angel investing and crowdfunding are two very different options startups can use to get the funding they need.
  5. Insights

    Buffett's Giving Pledge Gains 17 New Members

    The Giving Pledge, a promise to donate the majority of one's wealth to charity, gained 17 new members Wednesday, including the co-founders of Airbnb Inc.
  6. Small Business

    Who are Venture Capitalists?

    Venture capital investment firms can provide the seed money for high-risk, start-up companies. People called venture capitalists run these firms, and make the investment decisions.
  7. Insights

    Is Venture Capital Slowing in the U.S.?

    Venture capitalists are more selective in 2016, turning away from U.S. startups in an era of big business and slow growth prospects.
  8. Small Business

    Does Your Startup Need Venture Capital Money?

    Venture capital funding provides capital to grow a business. However, entrepreneurs will also lose some control over business decisions.
RELATED FAQS
  1. What type of funding options are available to a private company?

    Understand how private companies can obtain financing for startup, growth or expansion projects, and learn how this differs ... Read Answer >>
  2. How is venture capital regulated by the government?

    Learn about some of the ways in which the U.S. government and the Securities and Exchange Commission regulate venture capital. Read Answer >>
Trading Center