This article will give you insights into how a venture capital fund works. This mandate could differ for different VC’s but this article will describe the most common form of operating. The core activities will be handled in this article.
The Roles At A Venture Capital Fund
As mentioned before we will be looking at the core activities of venture capital. So we will be looking at the roles that are only performed in venture capital. In this section of the article, we will be looking at the analyst role, associate, principals & the partners.
The analyst function in a VC is the role of seeking out deals. This could be done in various methods. Some of the most used methods include attending conferences where they network with start-ups. Nowadays also a lot of research for potential deals is done online. This is also an activity of the analyst role.
Their role in a VC is limited. They do not have the ability to make the decision whether or not the VC is going to invest in the chosen start-up. So when a VC is interested in investing in your start-up most likely the analyst will forward you through to someone in a higher position.
The associate role is to be the middle man between the start-ups and the decisionmakers. As mentioned before this was also part of the task of an analyst. However, for associates, this is their main task. This is because they have more experience in introducing start-ups to the decisionmakers. They are usually better in analyzing and summing up a business so that the decisionmakers don’t have to check there work.
The principals are the ones that are allowed to make the decision whether or not to get a deal with a start-up. All the work of the analyst and associates leads up to the role of the principal.
Although they have the power to make investment decision they are not seen as the most powerful people of a VC. They are not the most powerful people of a VC because they do not have power over the strategy of the firm. If a principal would want to invest in a company which is not in the expertise of the VC. The principal is not allowed to do so as it differs from there strategy.
Within a VC there are two categories of partners. These include; general partners and managing partners. The two difference between the two types of partners will be explained in this section.
A general partner is someone who has invested capital into the VC and due to this has equity in the company. In a lot of cases, a person who is a general partner is also a managing partner.
A managing partner also deals with day-to-day operations. In the case of a VC, this means that they have the power to invest in a deal or not. In addition, they can design the strategy of the VC.
How A Venture Capital Fund Works
Usually, VC’s do not invest money of there own partners. Rather they invest money of limited partners such as hedge funds and pension funds
So in practice, this means that a VC also has to fundraise before being able to fund other companies. They do this by promising investors a high return, as the investment could be quite risky.
How Do VC’s Make Money?
VC has two inflows of money which will be described in this section of the article. These include management fees and carried interest or carry.
The management fees are mostly a percentage of the total fund of a VC. This amount is usually between 2 and 2.5%. The management fees could be seen as the cost of having your capital in a VC. This is the steady stream of income for a VC.
The carried interest or carry is a fluctuating income for a VC. Usually, the carried interest is 20%. This means that from the generated profits 20 % will go toward the VC. This stream of income only appears after approximately 10 years of operating. This is due to that a start-up first has to make an exit before this stream of income will appear.