FEATURE > Venture Capital

In Brief: VC Business Model
 
VC firms Generally comprise a group of partners who do the following:
raise investment funds
source deals
perform due diligence
make investments
provide support to growing companies
realize the appreciation in investments
 
Business Earn high returns by investing in early stage companies
 
Sources of
Investment capital
Pension funds, corporations, banks, endowments (especially in the US) and wealthy individuals.
 
Fund structure Investment capital is held in a legally established fund:
structured as a closed-ended fund, so no capital can be added at a later date
with a defined life time, usually 10 years, after which the capital plus appreciation must be returned to investors
managed and invested by the VC firm professionals
providing investors with limited control and limited liability.
 
VC Fee structure 2 levels of fees are paid to VCs by the fund:
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.
Share of the upside: 20% or more of the gain of the fund, after the capital is returned to the investors.
 
Investor expectations 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.
 
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VC Business Model
 
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