What is a venture capital fund (2024)

FAQs

What is a venture capital fund? ›

What are Venture Capital Funds? Venture capital funds are pooled investment funds that manage the money of investors who seek private equity stakes in startups and small- to medium-sized enterprises with strong growth potential. These investments are generally characterized as very high-risk/high-return opportunities.

Venture capital funds(VCFs) are investment instruments through which individuals can park their money in newly-formed start-ups as well as small and medium-sized companies. These are types of investment funds that primarily target firms that have the potential to deliver high returns.

What is venture capital in simple words? Venture capital is money invested in a business, usually a start-up, that is seen as having strong growth potential. It is typically provided by investors who expect to receive a high return on their investment.

Bottom Line. Retail investors can get exposure to venture capital through some public securities, or those who meet the income and net worth thresholds can invest in venture capital as an accredited investor. It's important to understand that investing in venture capital, even indirectly, comes with risks.

Venture capitalists make money from the carried interest of their investments, as well as management fees. Most VC firms collect about 20% of the profits from the private equity fund, while the rest goes to their limited partners. General partners may also collect an additional 2% fee.

Many venture capitalists will stick with investing in companies that operate in industries with which they are familiar. Their decisions will be based on deep-dive research. In order to activate this process and really make an impact, you will need between $1 million and $5 million.

Minimal Investment Is Expensive

These funds are typically only available to high-net-worth individuals and institutional investors. A hedge fund's minimum investment might range from $100,000 to $1 million. Venture capital funds usually require a minimum investment of $250,000 to $500,000 and sometimes higher.

Venture capital is an equity-based form of financing, whereby investors invest profits into a company and receive a stake in return.

Examples of Venture Capital

Series A, B, C, etc.: These are multiple rounds of funding that a company goes through, generally getting more substantial as the business grows. For instance, Facebook's Series A was $12.7 million from Accel Partners, while its Series B ballooned to $27.5 million from various investors.

Venture capital provides funding to new businesses that do not have enough cash flow to take on debts. This arrangement can be mutually beneficial because businesses get the capital they need to bootstrap their operations, and investors gain equity in promising companies.

Is Shark Tank venture capital? ›

Do the Sharks Use Their Own Money? The sharks are venture capitalists, meaning they are "self-made" millionaires and billionaires seeking lucrative business investment opportunities.

Investors in venture capital funds are typically very large institutions such as pension funds, financial firms, insurance companies, and university endowments—all of which put a small percentage of their total funds into high-risk investments.

Myth 4: VCs Generate Spectacular Returns

We found that the overall performance of the industry is poor. VC funds haven't significantly outperformed the public markets since the late 1990s, and since 1997 less cash has been returned to VC investors than they have invested.

As discussed in the question above, the Internal Rate of Return (IRR), also known as the Annual Rate of Return, for a venture fund should be in the 15% to 27% range.

Although the venture capitalist may receive some return through dividends, their primary return on investment comes from capital gain when they eventually sell their shares in the company, typically three to seven years after the investment.

The capital in VC comes from affluent individuals, pension funds, endowments, insurance companies, and other entities that are willing to take higher risks for potentially higher rewards.

Most VC funds are structured as a limited partnership (another type of legal entity), which is made up of at least one GP and at least one limited partner (LP). The GPs and LPs of a limited partnership can be individuals or legal entities.

Pros of Venture Capital:

Exposure: VC firms often have an extensive network of contacts in the business world, which can help to raise a company's profile and attract potential partners, customers, and employees. No repayment required: Unlike loans, venture capital investments do not require repayment.

Although the venture capitalist may receive some return through dividends, their primary return on investment comes from capital gain when they eventually sell their shares in the company, typically three to seven years after the investment.

The outperformance of venture capital funds is also evident using an IRR (Internal Rate of Return) metric. The average annual IRR return of VC funds between 2005 and 2018 was 22%, compared to 16.6% for all other PE funds.