| VC firms |
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Generally comprise a group of partners who do the following:
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raise investment funds |
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source deals |
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perform due diligence |
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make investments |
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provide support to growing companies |
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realize the appreciation in investments |
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| Business |
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Earn high returns by investing in early stage companies |
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Sources of
Investment capital |
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Pension funds, corporations, banks, endowments (especially in the US) and wealthy individuals. |
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| Fund structure |
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Investment capital is held in a legally established fund:
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structured as a closed-ended fund, so no capital can be added at a later date |
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with a defined life time, usually 10 years, after which the capital plus appreciation must be returned to investors |
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managed and invested by the VC firm professionals |
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providing investors with limited control and limited liability. |
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| VC Fee structure |
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2 levels of fees are paid to VCs by the fund:
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Management fees: usually 2% - 2.5% of the total fund amount annually, which the VCs are allowed to take out of the fund to cover operating costs. |
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Share of the upside: 20% or more of the gain of the fund, after the capital is returned to the investors. |
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| Investor expectations |
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Expect an overall return of at least 25% or more, net of all fees, over the life of the fund. This roughly translates to a 50%+ rate of return (IRR) on any given investment. |
