Introduction to Venture Capital

Venture capital funds (VC Funds) are pooled investment vehicles that provide capital to startups in exchange for equity. This week on Startupfon, we covered topics such as venture capital strategy, venture capital funds, and how they generate profits. Venture capital is a vital source of funding for startups showing high growth worldwide and plays an important role in job creation and economic productivity. Most of the world's largest companies (Apple, Amazon, Facebook, Microsoft, etc.) started with the financing and advice of venture capitalists (VCs) and continue to account for nearly half of the public offerings in the US. Venture capitalists make risky investments in startups with hopes of high returns. In recent years, with the rapid growth of the industry, more VCs are continuing to make larger capital investments than ever before.

What is a Venture Capital Fund?

Venture capital funds are pooled investment vehicles that invest in startups in exchange for ownership in these companies. These investments are not offered to the public market, meaning they are a type of private equity. Venture capital funds provide different returns for investors. The most common form of return is in the form of obtaining returns after an initial public offering (IPO) or a sale from another company (Liquidity Event). The manager of a venture capital fund is referred to as a “general partner” (GP). A GP is responsible for raising money from a network of investors, selecting investments, and overseeing all the operational, accounting, and legal aspects of the fund. A GP typically follows an investment thesis to select investments targeting a particular segment of the market and/or investment stage. Investors in a venture capital fund are referred to as “limited partners” (LPs). They are typically high-net-worth individuals or other financial institutions looking to gain exposure to the venture asset class. Venture capital funds typically invest in a range of startups expecting some to fail while hoping for a few big winners. The typical time horizon for most startup investments is 6-10 years. 

A venture capital fund invests in a company and then monitors the investment until the company either goes public or is acquired, generating returns for investors, potentially providing future funding in subsequent rounds. VC returns follow a power law distribution, meaning that a homerun investment in a portfolio of many companies can generate significant 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 on this risk. Startupfon offers investors a way to access the startup ecosystem and venture capital deals.