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Venture Capital Inside Look

High net worth individuals and super funds pool their money and invest to form venture capital funds. These funds are generally valued between $50M to $150M, however there are some valued over $1B, and are managed by the head of the venture capital firm, the General Partner.

The majority of venture capital funds last for a period of 10 years. The role of the General Partner is to source and identify companies to invest in, work with the founders to build the business and then to exit. The General Partner often hires a small group of investment professionals to support the investment cycle and, in some cases, deal origination consultants to help find deal flow of new opportunities.

Venture Capital firms make money by charging a small annual fee on managing the fund, typically 2%, and also 20% of the profits once all money is paid back to their investors. Contrary to what a lot of founders believe, venture capital is a long-term strategy with each investment cycle lasting 10 years. Most funds, depending on their size, will invest in around 30 companies.

Venture capitalists are professional investors who risk both their own money and that of their investors. They all understand the risks and have expectations that the majority of their investments will fail or will not realise a large gain. Having said that, they also expect a few of their companies to outperform others and provide exceptional returns, which more than repay back their investors’ initial investment.

There are tens of thousands of venture capital firms around the world that invest across all industries and at every business stage from concept to seed and beyond. Venture capital firms seek their deal flow primarily from referrals. There are many venture capital firms that don’t publish their contact details, with some only having a one page website.

To get access to venture capital, you need a referral. Venture capital firms seek deal flow and referrals from other investment firms, angel investors, advisory firms, and direct connections.

The Investment Phase:

Venture capital firms set out an investment mandate that details their criteria. This often includes industry preferences, stage of business, funding amount, business models, and also the profile of the founding team. Some specialise and others seek a broader investment mandate.

Venture capitalists will leverage their network of connections and contacts, other investment firms and angel investors to find deals to work on. As these funds have a 10-year lifecycle, venture capitalists will aim to spend all their funds’ money within 3 to 4 years. This will give them enough time to help nurture and grow their investee companies.

A vast majority of venture capital firms collaborate with other venture capital firms on each deal. That is, often one venture capital firm will lead an investment taking a majority of the capital raise whilst the other venture capital firms will co-invest on the same terms but taking smaller parcels. For instance, say you are raising $2M, one venture firm will invest $1.5M and three others will collectively invest the remaining $0.5M. Venture capitalists are often comfortable to invest alongside other investment firms, family offices and angel investors.

Company Support

Venture Capitalists prefer to contribute in the company and become active members of the investee company’s board. Most venture capitalists provide support at board level and help the founders with strategy and act as sounding boards. Some of the larger venture capital firms provide large support teams that can help with marketing, sales, technical development and human resources.

Cashing out

Towards the end of the fund’s 10-year cycle, venture capital firms can leave the business in one of three ways; by means of an IPO, such as listing on the Australian Stock Exchange, or by involving mergers and acquisitions such as a trade sale to a larger firm, or by selling their shares to another investor.

Selling the company provides both the venture capital firm and the founders the opportunity to realise their return for their investment and hard work. Having said that, in some cases a sale may involve a merger or partial sale or an IPO where the founders still remain active in the business and still hold shares in the business. There are many pathways and options available to you.

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Venture Capitalist Australia
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