Learn how to establish your company, how to Creating A Venture Capital Fund, and what it takes to become a founding general partner. What it means to be the founding general partner, and what investors expect from you in this capacity.
If you're thinking about founding and raising your own venture capital fund, you may already work for a venture capital company or be an angel investor. Perhaps you work for a tech business or a non-profit group that is not part of the startup ecosystem. Regardless matter where you start, it's critical to understand the ecosystem you're entering.
What is Creating A Venture Capital Fund
Venture capital (VC) is an investment technique where investors offer funds to early-stage private enterprises or startups in return for ownership stakes. Investors expect that startups will increase in value over time, allowing them to benefit from selling ownership in the firm during a liquidity event.
To pursue these objectives, venture capital investors combine their own resources with outside funds to invest in firms. Venture capitalists (VCs) are referred to as general partners (GPs) and outside investors as limited partners (LPs).The VCs established asset management businesses to oversee all of the funds they launched.
Read also: What Is A Venture Capital Firm
VC company versus VC fund
The VC company controls VCs' investing plans. When you hear the term "VC brand," you immediately think of this organization. The management business leases office space, hires investment analysts, and subscribes to financial journals. Successful venture companies sometimes run many VC funds at the same time—Fund I, Fund II, and so on.
The VC fund is a legal company that combines funds to invest in assets such as startups and has its own investing strategy. The fund then owns the assets until they are sold.
How can I create a venture capital firm
In the stages below, we'll go over how to start a new venture capital business before raising your first fund.
Step 1: Know your track record
Your track record reflects your prior investing performance, including the sorts of investments, reasons for making them, and returns achieved. Prospective LPs have a variety of businesses and funds to select from. Investment performance criteria such as TVPI, MOIC, and IRR are used to assess success potential.
If you’re starting your first firm or fund, you won’t be able to point to previous fund metrics. To prove to LPs that you have what it takes to be successful, first-time fund managers can establish a track record in a few different ways:
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Angel investing: If you are launching your first company or fund, you will not be able to reference past fund data. To demonstrate to LPs that they have what it takes to succeed, first-time fund managers may develop a track record in a variety of methods.
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SPVs: Making many angel investments might create a portfolio similar to a personal venture fund.
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Warehousing investments: Angel investments may be any amount, although they are often around $100,000.Fund managers may use special-purpose entities (SPVs) to get access to transactions.
Read also:Difference Between Private Equity And Venture Capital
Step 2: Partner up
You can establish a venture capital business on your own, but having someone else who can complement your own abilities might be advantageous in the beginning. For example, if you have a strong operational experience as a previous COO, you may collaborate with someone who has a background in finance or technological skills.
From there, you may choose the fundamentals, such as how you will pay yourself, where your office will be, what equipment you will need, and who you will recruit next.
The founding general partner role
As a fund manager, you will be both an entrepreneur running your own business and a fiduciary for outside funds. Your responsibilities include soliciting firms and founders, communicating with limited partners, building a portfolio, executing agreements, and managing funds.
That's why it's useful to start with the following (though not a complete list):
- A convincing investing argument.
- Good ties with the founders.
- Business or industrial competence.
- A competitive effort to get agreements.
- A wise portfolio creation approach.
- Excellent networking skills.
- Have patience.
- The capacity to explain why your fund is distinct.
- A willingness to give financially.
Step 3: Determine your VC firm’s structure
Limited partnerships and limited liability corporations (LLCs) are used to enable interactions between venture capitalists and third-party investors, as well as to run the VC firm's operations.
Limited liability business (LLC)
VC firms are often formed as LLCs, allowing members to benefit from limited liability and pass-through taxes. Separation of legal entities restricts responsibility to specific firms, rather than subjecting VC cashflows and assets to liabilities from any fund. This implies that if one of a company's funds becomes insolvent, it usually has little effect on the company's other funds.
VC firms then set up separate LLCs to serve as the general partner corporations for each venture fund. (Typically, the fund managers are members of the GP LLC organization.)
While management companies are commonly constituted as LLCs, the internal organization may differ based on the VC firm's operational preferences, such as team, overhead, and platform activities. Because the same staff inside a management business may provide services for many funds, the management firm will be spread throughout multiple funds.
Read also: Securing Small Business Startup Funding
Step 4: Fundraise and establish your fund.
To get your first fund up and going, you'll need access to a pool of money that may be used for investments. Typically, VCs generate funds by requesting contributions from other investors. These outside investors become limited partners in the fund.
Your fund's LPs will remain passive, but you, the fund manager, will make daily investing choices. Limited partners become investors in your fund by signing and submitting a limited partnership agreement, which specifies their connection with the fund.
Step 5: Bring the resources back in.
As the fund's general partner, the LLC you formed to administer its activities has the legal right to engage service providers.In businesses with many funds, the VC firm often serves as the managing company for all of the funds. In other words, the fund's general partner engages the venture capital company to undertake fund management responsibilities such as employing and compensating investing professionals, procuring office space and computers, and so on.
This allows the VC company to share its resources for the benefit of all of the funds it manages while protecting itself from liability.
Step 6: Operationalize your fund
The last step to starting your venture capital firm is identifying the right service providers who can help support and launch your fund.
This might include:
- You may establish a bank account for your money.
- If your fund requires an audit, contact an audit company.
- A tax professional may assist in preparing tax paperwork.
- A lawyer may assist alter the LPA and negotiate with LPs.
- A fund administrator oversees all back-office operations for your fund.
FAQ's Creating A Venture Capital Fund
Can I start my own VC fund?
To launch a venture capital firm, you must first establish a track record. If you haven't previously made any solid investments, it will be difficult to build your own fund. Go to work for a fund initially and make some smart investments there.
How much does it cost to start a venture capital fund?
The process of establishing a fund varies based on the stage at which the fund want to invest, the sector or industry, and the performance targets for its portfolio firms. Full-time general partners generally need $20 million to $40 million per head in fund size to pay salary and overhead, assuming a 2% management fee.
How do I set up a venture capital fund?
- Step one: Know your track record.
- Step two: Partner up.
- Step three: Determine your VC firm's structure.
- Step four: Fundraise and form your fund.
- Step five: Bring the resources back in.
How do I become a venture capital fund?
- Gain relevant education. There are various academic approaches you can take to become a venture capitalist.
- Get work experience.
- Seek opportunities.
- Identify a mentor.
- Develop a network.