Venture Capital Funds

What are 'Venture Capital Funds'

Venture capital funds are investment funds that manage the money of investors who seek private equity stakes in startup and small- to medium-sized enterprises with strong growth potential. These investments are generally characterized as high-risk/high-return opportunities. In the past, venture capital investments were only accessible to professional venture capitalists, although now accredited investors have a greater ability to take part in venture capital investments.

BREAKING DOWN 'Venture Capital Funds'

Venture capital is a type of equity financing that gives entrepreneurial or other small companies the ability to raise funding. Venture capital funds are private equity investment vehicles that seek to invest in firms that have high-risk/high-return profiles, based on a company's size, assets and stage of product development.

Venture capital funds differ from mutual funds and hedge funds in that they focus on a very specific type of early-stage investment. All firms that receive venture capital investments have high-growth potential, are risky and have a long investment horizon. Further, venture capital funds take a more active role in their investments by providing guidance and often holding a board seat.

Venture capital funds have portfolio returns that resemble a barbell approach to investing. Many of these funds make small bets on a wide variety of young startups, believing that at least one will achieve high growth and reward the fund with a comparatively large payout at the end. This allows the fund to mitigate the risk that some investments will fold.

The Operation of a Venture Capital Fund

Venture capital investments are considered either seed capital, early-stage capital or expansion-stage financing depending on the maturity of the business at the time of the investment. However, regardless of the investment stage, all venture capital funds operate in much the same way.

First, like all funds, venture capital funds must raise money prior to making any investments. A prospectus is given to potential investors of the fund who then commit money to that fund. All potential investors who make a commitment are called by the fund's operators and individual investment amounts are finalized.

From there, the venture capital fund seeks private equity investments that have the potential of generating positive returns for its investors. This normally means the fund's manager or managers review hundreds of business plans in search of potentially high-growth companies. The fund managers make investment decisions based on the prospectus and the expectations of the fund's investors. After an investment is made, the fund charges an annual management fee of around 2%.

Investors of a venture capital fund make returns when a portfolio company exits, either in an IPO or a merger and acquisition. If a profit is made off the exit, the fund also keeps a percentage of the profits in addition to the annual management fee.

RELATED TERMS
  1. Venture Capital

    Money provided by investors to startup firms and small businesses ...
  2. Venture Capitalist

    An investor who either provides capital to startup ventures or ...
  3. Venture Capital Trust - VCT

    A type of publicly listed closed-end fund found in the United ...
  4. Capital Funding

    The money that lenders and equity holders provide to a business. ...
  5. Seed Capital

    The initial capital used to start a business. Seed capital often ...
  6. Funding Gap

    The amount of money needed to fund the ongoing operations or ...
Related Articles
  1. Managing Wealth

    A Look Into The Secrets Of Venture Capitalism

    Venture capitalists own an equity stake in the start-up and have a say in the functioning of the company. Investments are generally made in early stages of a company with long term high growth ...
  2. Managing Wealth

    Seek An Adventure In Venture Capital

    Make a career out of chasing down the "next big thing".
  3. Managing Wealth

    Does Your Startup Need Venture Capital Money?

    Venture capital funding provides capital to grow a business. However, entrepreneurs will also lose some control over business decisions.
  4. Managing Wealth

    A Look into the Exciting World of Venture Capital

    We look into the world of venture capital, where deep-pocketed investors gamble on funding the next big startup (or the next big flop).
  5. Managing Wealth

    How Social Venture Capital Is Changing the World

    Learn what social venture capital is and the ways in which it differs from traditional venture capital. Identify two leading social venture capital firms.
  6. Managing Wealth

    Fed Raising Rates Affects Startup Funding

    With interest rates having nowhere else to go but up, the Fed’s impending interest rate raise will likely begin to reverse the flow of startup funding.
  7. ETFs & Mutual Funds

    The 4 Best American Funds for Growth Investors in 2016

    Discover four excellent growth funds from American Funds, one of the country's premier mutual fund families with a history of consistent returns.
  8. Insights

    Venture Firm Kleiner to Create 2 New Funds

    Kleiner's new funds are part of a new wave of VC investment, which has reached its highest rate in 15 years even after the startup frenzy has cooled.
  9. Managing Wealth

    Penny Stocks Vs. Venture Capital: Which Carries the Highest Risk?

    Learn how the challenges of venture capital investing and buying penny stocks differ and which type of investment carries the most risk.
  10. Investing

    Understanding Capital Investment

    Capital investment is a term that describes a company’s expenditures for long-term assets used in the operation of its business.
RELATED FAQS
  1. How is venture capital different from other kinds of equity financing?

    Learn how venture capital equity financing differs from other funding options and what companies need to be aware of prior ... Read Answer >>
  2. Where does venture capital come from?

    Obtaining funding from venture capitalists is the way to go for those who have great ideas with potential for becoming lucrative ... Read Answer >>
  3. What are some of the disadvantages to taking venture capital?

    Learn how financing a business through venture capital can be a viable source of funding for small businesses but know caveats ... Read Answer >>
  4. Which industries can benefit the most from venture capital?

    Read about the kinds of industries that tend to receive the most venture capital funding and why private equity investors ... Read Answer >>
  5. What is the difference between private equity and venture capital?

    Learn the differences between private equity and venture capital, especially in terms of how these types of firms invest ... Read Answer >>
  6. How is venture capital regulated by the government?

    Learn about some of the ways in which the U.S. government and the Securities and Exchange Commission regulate venture capital. Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center