Venture Capital Funds
See: Venture Capital. See: Venture Capitalist.
So...VC funds are the darling lottery ticket of the wealthy, for the most part. Most quality funds come with investment minimums of a million bucks. A typical fund is $500 million-ish. And fund administrators are happy to just have a few hundred investors to deal with, rather than thousands.
So how's it work? Well, initially, there is a call made, asking for investor money to kick off the fund. If a Limited Partner has committed $1 million, and 15% is called for the fund's inception, then the LP writes a check for $150,000 to the General Partners of the fund, who take 2% a year off the bat for management fees. That money then starts to get invested in promising startups. And little by little, the million bucks is drawn down from LPs until the fund is "done."
Most funds last about a decade. After a few years, hopefully, funds start to realize gains and then distribute back to LPs the winnings, usually after taking their 20-30% cut of profits. The LPs receive the gains in cash if a cash purchase was made (i.e. MSFT bought a young startup that has awesome cell phone security for $100 million in cash, and the fund owned 12% of it, so the fund books a $12 million cash gain). Or the funds are distributed out in shares.
If LPs get shares in return for their investment, then those shares are not taxable as gains until the LP sells those shares and turn them into cash. Some funds return many multiples of their original inception value...but 3x the fund, or $1.5 billion in 10 years, in this case, is considered a "good score," even though (relative to the S&P 500) it's not all that great in most periods, given the amount of risk taken.
But some funds return 20x, 30x, 50x...hence the lottery ticket vibe, and the renaming of it being a venture fund to just being...venture "fun."
Related or Semi-related Video
Finance: What is Venture Capital?755 Views
finance a la shmoop- what is venture capital? Google Facebook Yahoo Netflix
LinkedIn snapchat Instagram well they were all originally funded by venture [logos flash across screen]
capital. and the common theme was that two college dropouts built these
companies starting in a garage in Silicon Valley, creating something
dot-com that would change the world. and the world's a mess so it needs a lot of
changing. venture capital comes in a few flavors-
the earliest rounds are called seed capital, and it usually mean that an
original investor put in a few hundred grand, maybe a million or two .the money
was invested at the very beginning of a company when it usually has no revenues [seed capital defined]
no product no nothing. just a hope and a dream and a big idea .and the idea can be
huge. at one point Yahoo's original seed
investment returns 10,000 times its original capital. a regular seed level
investors are called angels and they are typically previously
successful founders or entrepreneurs who want to recycle precious high risk
capital back into the Silicon Valley ecosystem in that form. and yeah Angels [man holding money looks excited]
know that 99 plus percent of their investments go fully bankrupt, but a few
become lottery ticket winners which produce massive returns and those
returns make up for the many many many losses. well once a company has say a
million bucks in revenue and has likely burned through the original seed money
million-ish or so that they raised, well they would then seek to take in what's [money burns in a fire]
called an a round. ie a first level full venture capital round where the company
raises four or five million dollars to then bring it to the next level of
growth. either in product use or revenues or depth and power of its patents or
intellectual properties and so on. anyway later stages of venture capital
investment are cleverly tagged B C and D rounds. and when a company is in the tens
of millions of revenues looking at a hundred million around the corner well
they would raise what is called growth capital- if they're no longer a [people peek around a corner]
speculative venture and they then appeal to a lower risk lower reward group of
investors. so where does the venture capital money come from? well the initial
seed amounts are relatively tiny. a pocket of 50 million dollars might fun
a hundred early startup companies for years and in the scheme of all the
wealth and Silicon Valley well 50 million bucks is just lunch money. a
normal sized venture capital fund might have half a dozen partners and another [business people smile at each other]
half a dozen junior partners .it would raise money from what is called limited
partners and that has nothing to do with the department store. the people
responsible for investing the money diligently are called the general
partners, and for this pleasure the general partners charge roughly 2% a
year in management fees and then they also take a 20 to 30 percent success fee
or carry if their fund pays back all of its initial capital and then has real
profits. so for a normal-size venture capital fund now let's say there's just
four general partners if they raise four hundred million dollars, invest it well
and in say eight years they've produced maybe a dozen IPOs and they've sold [graph showing growth]
maybe a half a dozen other companies so that the 400 million originally raised
has now turned into 2.4 billion dollars well they would show a profit of 2
billion bucks, and if their carry was 25 percent then the partners would split
five hundred million dollars among the four of them. and they'd get that all in
addition to the nice fat salaries they were taking along the way, so yeah it's a
nice work if you can get it and then there's the other side of the street as
an entrepreneur, if you're looking to start any sort of major venture you'll
need to attract some venture capital unless you know you and your buddy in
the garage have a couple mil just lying around with nothing better to do. [two people sit behind computer screens]
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