Venture Capital Fund

Venture capitalists pool the money of investors who wish to invest in start-ups and small- to medium-sized corporations that have great growth potential. Such ventures are often considered as high-risk/high-return investments. 

Initially, venture capital (VC) investments were only available to professionals in the venture capitalism field but now accredited investors have more opportunities to participate in this type of investment. However, not many small-scale investors find it easy to engage in VC funds. 

Understanding Venture Capital Fund

Capital adventures (VC) is a form of equity financing that enables ambitious or other minor firms to access funds before they have commenced operations or generated revenues or profits. Venture capital funds are vehicles of private equity investment that aim to put money into companies with high-risk /high-return features in terms of volume, assets, and product development stage. 

In their focus on a particular sub-stratum of start-up funding, venture capital differs from mutual funds and hedge funds. All corporations funded by VC have long-term outlooks and are typically characterized as hazardous as well as growth-minded; correspondingly, venture capitalists usually engage themselves deeper into company operations, including the provision of consultations and representation in boards. Therefore, venture capital funds actively participate and closely monitor the direction of management and operations in the companies that they invest in. 

Venture capital funds exhibit barbell-like investing strategies. The risk of losing money makes them share the values of start-up companies that are very young. Consequently, they can have several of them, knowing there will be few, which will eventually become big winners, hence paying off the assumedly exorbitant sums at the end period and reducing the risk involved. 

Working of Venture Capital Fund

Funding of various stages is a category of venture capital investment ranging from early financing and seed money to growth finance granted based on the developmental stage of a company when investment took place. Nevertheless, irrespective of the venture capital phase, all funds associated with this conduct their operations according to common rules. 

Venture capital funds, like all pooled investment funds, are required to raise money from third-party investors before they can invest their own money. This means that after the prospectus is given to those who might want to invest in it, they commit to it by putting money into an account. The fund contacts everyone who has put up money for it and works out the specific amount each person will contribute. 

After that, the venture capital fund looks for private equity investments where their investors can get big profits from. This means that usually, the manager or managers go through hundreds of business plans and look for companies that may grow very fast. Fund managers invest by following the prospectus guidelines and what their clients want. The fund usually charges an annual management fee of around 2% of assets under management (AUM) after an investment is made, excluding some funds that only charge performance-based fees without any upfront charges. These charges are used to pay the annual salaries and cover expenses for the general partners. There are times when management charges for big funds are restricted to invested capital only or reduced after some years have passed. 

Stages of Investment

Every company must pass through different stages to be funded by venture capitalists. At each point, various aspects necessitate consideration. These main ones are: 

Pre-seed  

In the venture capital world, the first stage of investment is usually done at the beginning of a new startup before its products have been fully developed and tested. 

Seed 

Startups use this method regularly to show that their idea is profitable, and venture capitalists’ investments are not risky and, hence, modest. 

Expansion  

When a company shows tremendous growth but requires more funding to meet its growth, it uses venture capital to expand the market and diversify its product offerings. 

Mezzanine financing 

This is the final stage of venture capital investment, also known as series C funding. 

Series A 

They assess the enterprise that requires finance based on its history of performance, management structure, market size, and risk. 

Series B 

When a company has established itself in the market, increased its earnings, and witnessed substantial growth, it needs to go to a second major round of venture capital funding. 

Examples of Venture Capital Fund

Illustrative examples of successful pioneers can give an idea of the positive nature of early venture capital investments that turn out to be successful. 

Twitter 

In the social network’s 2007 series A funding, Union Square Ventures (USV) invested less than $5 million. However, other venture capital firms shied away, expressing doubts that the company could profit from the service. 

USV participated in some funding rounds hosted by rival VC firms while skipping out on others. When Twitter did its own IPO back in 2013, it brought in $1.8 billion, making the company’s value $14.2 billion. Hence, in that first round, $863 million was at stake; this is how much USV made by investing, let’s say, 17,160%. 

Alphabet 

Kleiner Perkins Caufield & Byers and Sequoia Capital then were known as leading the series A funding round for Google, Alphabet’s predecessor, in June 1999. This involved raising $25 million to value the search engine at $75 million.  

Additionally, several other individuals made early investments in the opening round. These included Tiger Woods, Shaquille O’Neal, Henry Kissinger, and Arnold Schwarzenegger. 

In 2004, Google had an IPO selling equity shares that represented ownership interests in a company. The two firms, Kleiner Perkins and Sequoia, subsequently owned $4.3bn each. This is more than 300% returns per year for every single one of these two venture capital organizations. 

Frequently Asked Questions