Venture Capital 101: Structure, Returns, Exit and Beyond by Pocket Sun

TL;DR - Venture Capitals use funds from LP to create a pool that they invest in different companies with an end goal of liquefaction.

Helpfulness - 4

Tags - fund structures, VC compensation, VC exit strategy

Questions addressed:

  • What is the basic structure of a VC firm?
  • How are the funds at VC firms allocated?

Summary:

  • Three types of Venture Capitalists: Domain expert, Network, Operator
  • A domain expert is someone who’s deep into a certain field and knows everything going on in this industry. An operator, or a growth expert, is someone who has a track record of growing and scaling a company. A networker is someone who can make important intros to domain experts, operators, or your next investor.
  • The management company receives the management fee from the fund (about 2%) and uses it to pay the overhead related to operating the venture firm
  • Three investment Fund types: focus on stage, focus on geography, focus on sector
  • How to generate returns: Share purchase, Acquisition, IPO
  • 9 out of 10 VC backed companies do not exit
  • Each fund is typically active for 3–4 years, but has a lifetime of ~10 years for harvesting returns.
  • A large portion (sometimes ~50%) of a fund is reserved for follow-on investments to support existing portfolio companies.

Follow up links:

Why VCs push companies to liquify/exit