Venture Capital 101: Venture Capital
Venture capital funds (VC Funds) are pooled investment vehicles that provide capital to startups in exchange for equity. At Startupfon-Blog, we talked about venture capital strategy, venture capital fund and how it makes money for you this week. A vital source of finance for high-growth startups worldwide, venture capital also plays an important role in promoting job creation and economic productivity. Many of the world's largest companies (Apple, Amazon, Facebook, Microsoft, etc.) started with the funding and advice of venture capitalists (VCs) and now continue to account for almost half of the IPOs in the US. Venture capitalists make risky investments in startups in hopes of great returns. With the rapid growth in the industry in recent years, more VCs than ever are continuing to invest more capital.
What is a Venture Capital Fund?
Venture capital funds are pooled investment vehicles that invest in ventures in exchange for ownership in those companies. These investments are not offered to the public market, so they are a form of private equity. Venture capital funds provide different returns for investors. The most common form of return is after an initial public offering (IPO) or a purchase from another company (Liquidity Event). The manager of a venture capital fund is called a "general partner" (GP). A GP is responsible for raising funds from a network of investors, selecting investors and overseeing all operational, accounting and legal aspects of the fund. A GP usually follows an investment thesis to select investments that target a specific segment of the market and/or investment stage. Investors in a venture capital fund are called "limited partners" (LPs). They are usually high-net-worth individuals or other financial institutions seeking exposure to the venture asset class. Venture funds often invest in a series of ventures hoping for a few big winners and expecting some to fail. The typical time horizon for most venture investments is 6-10 years.
How Do Venture Capital Funds Make Money?
A venture capital fund invests in a company and then monitors the investment that potentially provides future financing in subsequent rounds until the company experiences an IPO or acquisition that yields returns for investors. VC returns follow a power law distribution, meaning that a homerun investment in a portfolio of many companies can generate large returns for the entire fund. Because venture capital funds invest in early-stage companies, these investments carry a high degree of risk. The high return potential of these investments helps encourage taking this risk. Startupfon offers investors a way to access the startup ecosystem and venture capital deals.
