Structure Of Venture Capital Funds
Venture capital funds are a kind of private equity capital generally provided by outside investors to new businesses. Usually a high risk venture, they offer a potential for above-average returns. The main focus of this article is to study and look into the structure of Venture capital funds. Read on.
The main objective behind the Venture capital funds is to primarily invest the financial capital of third-party investors in ventures and businesses which are too dangerous for the standard capital markets or bank loans. Including managerial and technical skills, most venture capital funds are collected from a group of wealthy investors, investment banks and other financial institutions.
Let us now look into the composition of Venture capital funds. Most venture capital funds have a set life of 10 years. But there is the likelihood of an extension for few years to allow for private companies still seeking liquidity. The investing phase for most funds is normally three to five years. Beyond that, the focus shifts to how to manage and make follow-on investments in an existing portfolio.
A successful example of this model was founded by booming funds in Silicon Valley in the 1980s to invest in technological trends broadly. Minimizing the exposure to management and marketing hazards of any individual firm or its product was another priority. In such VC funds, the investors have a preset commitment to the fund that is at the start unfunded. But it is subsequently "called down" by the venture capital fund over time as the fund makes its investments. There are considerable consequences for a Limited Partner or investor that fails to contribute in a capital call.
It can take any time period, from a month or several years for venture capitalists to build funds from limited partners. Once all the money has been raised, the fund is then said to be closed, and the 10 year lifetime starts. Some venture capital funds have partial closes too when one half of the fund has been put up. Vintage year" generally points to the year when the fund was closed, stratifying VC funds for comparison. The free database of venture capital funds reveals the difference between a venture capital fund management company and the venture capital funds managed by them.