Pledge funds are is a form of private equity investment in which all the participants in the fund are working toward a specific investment goal by committing to make payments to the pooled fund. The amount and the frequency of the payments are committed or pledged as part of the process. This makes it possible to determine in advance how to make the best use of the resources in the pledge fund at various points throughout the investment project.
One of the situations where the use of a pledge fund strategy proves helpful is with venture capital investing. For example, if a group of angel investors decide to provide seed capital for a new business, the group determines they will underwrite the operational costs of a new business for a specific period of time. The pledge fund is structured so that each investor contributes resources on a pre-determined schedule, thus ensuring there is always money on hand to cover the costs of operation. This allows the business to focus on getting established, finding a consumer base, and achieving profitability within an appreciable period of time. Ideally, the business will become profitable before the venture capital funds are exhausted, and the investors can begin to realize a return on their investment.
The difference with this pledge fund approach is that it allows each venture capitalist in the group of investors to determine what projects they will support, how much they will contribute, and when those contributions will be made. This is somewhat different from other investor group models, where all members of the group participate in all venture capital projects that the majority of investors choose to support. From this perspective, the pledge fund provides the chance to earn a return, but provides each investor with a greater amount of autonomy.
One of the factors that has made the pledge fund approach so popular today is the dot com crash that took place at the turn of the 21st century. After the dot com bubble burst, many venture capitalists began to scrutinize start-up businesses more closely before choosing to invest in them. This lead to a shift in the way some groups of venture capitalists chose to work together, since the pledge fund approach made participating in a particular project voluntary rather than requiring that all members participate in every project. Doing so simplified the process, since anyone who was unsure about a given opportunity could refrain from participating, while others who supported the project could proceed without taking time to convince others to participate.