Here is another video on venture capital that looks into the structure of a venture capital fund and how it invests in companies. If you missed the earlier venture capital introduction video, click here to watch that free video. Again, this video is not comprehensive and if you’re looking for a more complete training in private equity, please visit the Certified Private Equity Professional program to learn more.
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Summary of Venture Capital Structure Video
What is a Venture Capital Fund?
A venture capital fund is an investment fund, typically organized as a limited partnership in which the limited partners provide the capital to an investment pool that is managed by the general partner.
Who are the Limited Partners?
Endowments, pension funds, institutional investors, accredited high net worth individuals and other sophisticated investors often make up the bulk of a fund’s limited partners. These LP’s will contribute capital to the investment fund and agree to pay the management and performance fees to the general partner.
Who is the general partner?
The general partner in a venture capital fund is often a team of professional venture capitalists with deep background in the area of which they are investing in. The GP relies on a strong team of analysts and dealmakers to evaluate and execute on investments in startups and small businesses with high growth potentials. The general partner will most commonly be compensated in the form of a 20 percent performance fee and a 2 percent management fee. In this structure, the LP’s agree that the General Partner takes a 20% cut of the performance of the fund (sometimes with a high water mark that must be reached first) and the General Partner takes a 2% fee on assets under management to pay for operating expenses. Often the General Partner will commit capital to the fund to insure an alignment of interests and to show that the VC has “skin in the game.”
Characteristics of a Limited Partnership Venture Capital Fund
Long term private equity investment: 7-10 years.
High Possible Return.
How does it work?
Limited partners sign a Limited Partner Agreement to commit X amount of capital to the fund.
The General Partner closes the fund after reaching an acceptable capital commitment level.
The Limited Partners do not actually contribute money until the General Partner calls down the capital.
When the GP finds a company to invest in, the GP will call down capital from the limited partners and invest it in the start-up.
The GP can continue with capital calls up to the amount that the LP has committed to the fund.
The venture capital fund will invest in a number of promising companies and the GP will often offer resources, advice and business to help grow the business and improve management.
As the business grows, the venture capitalist might look to an exit through an IPO as was the case recently with Facebook, recapitalization (where The VC exchanges its equity for cash, the management team gains equity incentives, and the company is positioned for future growth.) or through a merger or acquisition with another firm.
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