1. Ease of obtaining financing
It commonly takes less time to receive funds from an angel investor, as obtaining venture capital funds is a highly rigorous process. Therefore, your business should meet all the investment criteria before being considered by a venture capital firm. The difficulty with angel investors may arise in case your business requires funding from several investors, as they could demand different terms.

2. Investment Size
The range of venture capital funding is larger than the one of angel investors. Angels act alone or in organized groups and invest their own money. Venture capital firms are corporate entities that pool money from a range of investors. Angels typically provide under $1 million, venture capitalists mostly above $1 million.

3. Stage focus
The focus of angel investors is typically the earlier or the seed stage of your start-up company. Venture capital firms focus on different stages of your business. Vc providers are much less likely to invest at the seed stage and they may provide second round financing after angels. Moreover, their purpose is to take your venture to the initial public offering stage and beyond.

4. Industry focus
Angel investors vary in investment areas and may allocate funds to a range of fields, frequently within their areas of expertise. Venture capital firms generally concentrate on emerging sectors such as technology or innovation.

5. Geographic Focus
Both business investors often prefer to invest within the vicinity of their offices. The purpose is to add management value to your company and to easily monitor all their portfolio companies.

6. Expected returns
Both angels and venture capitalists generally expect a high rate of return for their investments. Stereotypically, a venture capitalist may have higher return expectations than an angel investor.

7. Expected Control
Angel investors and vc firms are similar in that they expect a board position and possibly a consulting role. Both invest in return for an ownership stake in your company and for a certain degree of involvement, but venture capital firms will exercise even more control over your company.

8. Support and Expertise
Angel investors will more than likely provide support and advice to the start-up business. Vc firms generally possess greater expertise, as they prefer to lead ventures through successive funding stages.

9. Risk taking
A venture capitalist prefers to invest in a business that will offer security and a high return on investment. An angel is far more likely to be a risk taker and put money into a venture at the riskier seed stage.

10. Motivation
Angel investors are also motivated by the desire to see innovative ideas get off the ground and become successful businesses, whereas venture capitalists are more motivated by profit.

As you need to maximize your chances of obtaining the suitable level of financing for your start-up business and minimize the amount of time spent for that purpose, a Venture Capital Firms, Angel Investors & Private Equity Funds Directory will make a difference.

Author: Len M Williams
Article Source: EzineArticles.com
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A venture capital firm is actually a company made up of a number of businessmen and investors looking for upcoming and small entrepreneurs to invest their money on. Often referred to as private equity investors, this group of people are always on the lookout for brilliant business ideas and pitch-ins, which will give them a substantial amount of return in their investments at the soonest possible time.

When you approach a venture capital firm for whatever purpose you might have, you need to always prepare yourself before you meet them up. If you’re someone who would like to offer an investment, then you need to consider how much money you’re willing to invest and how soon would you like to get the profit out of it. Of course there will be risk involved as in a typical investment portfolio and to gauge this risk with a certain venture capital firm, you need to setup a meeting with their investors.

One of the truths in the business market is how the risk is directly proportional to one’s investment and return of investment as well. The larger the money you are willing to invest, the bigger the risk will be. The bigger the risk is, the larger the probable return on investment you can receive. The financial asset of these venture capital firms goes into the early stage capital of several small businesses and hence, your expected return will be largely dependent on how successful is the operation of that small business venture.

As one of the small business investors, you need to convince these business owners that you are interested in their business portfolio and you’re willing to give a huge amount of money as a startup investment in their business venture firm. Members of a venture capital firm have well-guarded trade secrets and if they find you trustworthy enough, they may very well treat you as one in the league.

As an entrepreneur, on the other hand, you need to sell them your business idea convincingly enough so as to invest money for your early stage capital. Oftentimes, a great business idea will be picked by reliable venture capital firms and they’d even fund a hundred percent of your startup funds right there and then. Of course they will be partaking some of your profits but given the financial circumstance, that’s the most sensible thing to do.

It is about dedication It is about energy It is about having the ability to get the job done

You should not think too much about how much money your new job needs. If the lender/ investor are sold, you will have the money. Its starting may change your life for the better with proven ideas on successful of it, practical guidance on how to incorporate it, partnerships and a run-down of financing options and etc.

There are so many business investors, all sources for its financing are: Small Business Administration, banks, and private angel investors, strategic alliances, leasing companies, venture capital investors, MESBICs, SBICs, credit union coalitions and other more. But there never seem to be enough funding sources when a company is seeking financing.

Investors business responds to its plans that meet their needs and specifications; they ignore all the other plans. Your plan must have investors identified before ever written. It does not matter how great a company is, if it does not fit the parameters of standard funding sources, loans and grants will be out of reach.

What is the Startup Strategy?

There are major points to consider:

1) Define your Business and Vision

What business are you in? Who is the customer? What do you sell (product/service)? What is your primary benefit? What is your plan for growth?

2) Write down your Goals

3) Understand your Customer

4) Learn from your Competition

What competitors do you have? What do you know about your target market? How are competitors approaching the market? How can you improve upon the competition’s approach? What are the competitor’s weaknesses and strengths? What are the lifestyles, demographics and psychographics of your ideal customer?

5) Financial Matters

Assumptions Start up Investment Running Monthly Overhead Cumulative Cash Streamlined Sales Forecast Break-even

6) Identify your Marketing Strategy

Identify All Target Markets Qualify the Best Target Markets Identify Tools, Strategies and Methods Test Marketing Strategy and Tools

I hope you have got your all the answers.

The fact that a lot of great new business plans come from teenagers out of school or in college is not surprising. Some of the largest computer companies including Google and Microsoft were started with ideas that the entrepreneur had while still in school.

Developing a business plan and finding startup funding for a teenage business follows the same principals. However, sometimes it is just harder for a teenager to get an appointment with venture capitalists for funding.

A business plan with a marketing strategy that has been tested and proved verifiable results is essential for teenage entrepreneurs. It is the business plan and the results that can get help a teenage business entrepreneur get VC funding.

A teenage entrepreneur needs to revise the business plans and the sales pitch before meeting with venture capitalists. If the business plans are not professionally done, teenage entrepreneurs face the risk of not being takes seriously by venture capitalists.

There are several business avenues that are open to teenagers. One business service is pet sitting and pet accessory designing. There is some money to be made from this business. Teenagers planning to start a pet business require only a small amount of startup capital. Most times they will be able to get the finances from family and friends.

Teenage entrepreneurs should also find a way to make their age an asset rather than a liability when approaching business investors for funding. One way of doing this is by showing the investor a list of courses completed as well as extra curricular work undertaken.

A teenage entrepreneur who is interested in maintaining a balance between work and school should keep an account of all work done for school as well as for work. The entrepreneur should also as far as possible try and maintain the business within the startup capital provided and not pitch into personal savings.

It may be difficult for teenage entrepreneurs to be taken seriously when they first approach venture capitalists for funding. However, sound business plans and market research that supports the idea will help entrepreneurs find their funding.

For more resources about Invest capital or even about small business investment company and especially about business investor please review these links.

A business entrepreneur of a new business needs to write several business plans to attract different people. There are several versions of business plans to do so from mini plans to full length presentation business plans.

The full length presentation business plan, which outlines the business proposal as well as the financial outcome of the business, is what most banks and other lending agencies are interested in.

Banks concentrate most of their attention on the financial strength of the business plans. Although the concept of the new business is important to them, the bottom line is much more significant.

Venture capitalists and angel investors on the other hand go through scores of business proposals every day. While selecting from a pile of business proposals, they are looking for ones that clearly outline the business plan and make an impression fast.

Venture capitalists see hundreds of plans in a year, so they take very little time in examining each of these business plans. Therefore to catch the attention of venture capitalists, the business proposal for a new business needs to be cogent and succinct. Entrepreneur should also highlight the impressive backgrounds of the management team.

Angel investors also go through several business plans in a year and therefore like brevity in the business plan.

Business plans that need to be presented to potential partners should deal with the ownership structure and clearly spell out matters of control and accountability.

Business plans that are presented to suppliers of a new business are completely different from the ones that are submitted to venture capitalists. These business plans tend to focus on cash flow of the new business. Suppliers like to make sure that entrepreneurs are able to meet the monthly payments for the supplies.

Finally, employees like to see business plans that are edited to their understanding. These plans need to show employees in which direction the company is heading and what the future plans for the new business involves.

For more resources about Invest capital or even about small business investment company and especially about business investor please review these links.

Business investors funds usually used to accommodate the additional funds needed. The investor can be a group of private individuals or one individual who invest in a business for a return of a piece of the profits.

There are several kinds of investor funds you can use to take your business to the next level. These types of funds can come from an institution like a bank or a private investor. Not all of the following may apply to you, but you must always weigh all of your options, especially at the early stages of business.

One of most common types of investors funds come from ones family. Asking the help of family members can be something that works. As long as you can provide a decent enough return to your investor and have good relations with your family then you can ask for their help. The most fundamental benefit of asking for investment from your family is that the business will always remain in your family.

Another commonly used source is venture capitalists. Venture capitalists buy into businesses all the time primarily because they are looking for returns on their investments and because they can mobilize and inject large amounts of capital fast.

Keep in mind that they are one of the most stringent investors fund sources when it comes to screening. Typically, venture capitalists deal only deal with businesses that offer very high rates of return, such as those that offer rare products, inventions, new medicines and technology, or cutting-edge research.

Another common source of investor funds are angel investors. These investors are commonly wealthy individuals that are interested to take on a percentage of your profits by providing you with the appropriate capital.

As you can see there are many ways to get some investment in your business. Before you proceed with engaging in negotiations with these people you should keep in mind that you will need to have a solid business plan or else no one will invest.

Author: Gus Smitherson
Article Source: EzineArticles.com
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Silent business investors are people who infuse capital into a business, usually a startup, but who prefer to leave the management of day-to-day affairs to other people. They typically decide to put their money into the venture when their business acumen tells them it has promise. They invest capital, then sit back to watch their money grow, or share in the loss if the venture fails.

It has been said that the primary role of silent business investors in a business venture is to infuse capital, especially to startup companies. While a successful business starts with a great idea, it definitely requires more than that to set up the business. For the most part, you will need enough capital to establish your business and get it working, and to sustain it until such time that it breaks even, and then start earning profits. To get enough funding, most startups turn to silent business investors, especially when the money they’ve pooled from contributions of family and friends is not enough to get the business off the ground.

Some silent business investors do not provide the actual capital to start the business, but offer their own property as collaterals instead so the startup owners can secure a grant or loan. Others act as sureties, guarantors or co-makers for startup owners. Their good credit standing facilitates loans and grants in favor of the owners that they would not have been able to secure on their own.

Once a silent investor decides to put his money into a business venture, he necessarily becomes interested in the success of the venture. Because of this, he opens his network for the startup company to access and explore. Investors’ network of connections often proved to be a rich source of business opportunities for startups.

As we have said, in these tough times, silent business investors could just be the break that your business needs. But before you sign on the dotted line with a silent investor, make sure you do your homework.

First, you have to level any potential investor’s expectations. Sit down with anyone interested and explain everything in detail, including the risks. Don’t be afraid of turning them off. Chances are, they know that every business venture is faced with risks, and yours isn’t an exception.

Lastly, when you’ve agreed on the investment terms, make sure you get down all the items in black and white. Better yet, consult a lawyer when drafting the contract so you’re that all the details are clear and settled, and that your agreement is enforceable in the courts, in case your relationship turns from sweet to sour. It is no exception if you’re dealing with family or long-time friends. Business has a way of turning best friends into the worst enemies, so make sure you protect your interest with a formal contract.

The core to any proposed Islamic financing transaction is that Shariah (Islamic law) prohibits interest-based lending. Moreover, Shariah further prohibits investments in certain activities which are seen as being in violation of Islam, such as gambling.

However, in essence, the mechanisms of venture capital do not provide for interest-bearing lending. Rather, at the core of any venture capital funding is an agreement to share in the risks of the business venture in return for the profits derived from such business venture.

As such, rather than being contrary to Islamic law, many scholars hold that venture capital funding complies with one of the cornerstone principles of Islam: it provides much needed investment to start-up companies in return for potential rewards, while accepting the risks that may be involved in such a deal. This type of structure in Islamic Finance is called mudaraba financing that is used over many centuries in the Islamic world.

Structuring an Islamic venture capital deal

The most accurate translation of a mudaraba financing is a contract under which one person, the investor (known as the rabal-maal), brings financing and the other person, the entrepreneur (known as the mudarib), brings expertise and effort. Collectively they share the proportionate profit as per their pre-arranged agreement.

Fundamental to the mudaraba financing structure, however, is the fact that the entrepreneur cannot be placed at risk of losing any monetary investment/value. If the business venture were to fail, then the maximum the entrepreneur could lose is the investment they make in the business enterprise themselves (i.e., their own money); plus any time and effort they put into the venture. The reason why this is the case is because under Islam, you cannot loose what you do not contribute.

In addition, under a mudaraba financing structure, strictly speaking, the investor is not allowed to partake in the management affairs of the business venture in which they have invested, they’re simply an investor – period. Day-to-day and overall management of the business must be left to the entrepreneur.

Differences between Islamic and Western VC funding

While the mudaraba Islamic financing structure does provide for a form of venture capitalism, it also raises certain issues that Western venture capital funds may find un-easing.

One core difference between venture capital investments that comply with Shariah law and those more commonly seen in the West is the allocation of loss risk.

Traditionally, venture capital funds invest in high-risk businesses in which there is an above average chance that the business will not be a viable enterprise, but where the profit upside is huge. In most cases, this has concentrated around the area of technology companies, but today it could equally apply to other industry sectors; such as media and medicine. A recurring theme, however, is “high risk”. For example, each of Yahoo!, Google, Apple, YouTube and MySpace have, at some time or other, received venture capital funding. And for each of these successes, there have been a hundred failures!

Given that venture capital funds historically invest in high risk industry sector businesses, over time, venture capital firms have put in place a structure that allows them to exit from the investment: (a) with maximum profits; and (b) with minimum losses. As we shall see, under Islamic Shariah law, both of these create a problem. One of the first discussions that takes place for any venture capital fund looking to invest in a business is how they plan to exit from the business. All things being well, the chosen form of exit by the venture capital fund will be by way of an initial public offering (IPO) of the shares in the business to the general public. However, electing to have an IPO as an exit strategy in an Islamic venture capital investment financing structure is not permissible. Thus, an alternative mechanism needs to be considered.

On the flip-side, as previously mentioned, in a worst case scenario, if the business venture fails, the entrepreneur (mudarib) cannot lose more than the time and effort they have invested in the business. As such, in effect, the investor bears the brunt of the financial risk that the business will fail. Thus, traditional mechanism that would otherwise limit the venture capital fund’s losses, or would otherwise give the venture capital firm a preference over the other investors in the business in a bankruptcy scenario, such as with the use of a preference share structure, are prohibited under Islamic law.

The second core difference between a Western structure venture capital financing deal and an Islamic venture capital financing deal relates to the management of the business itself. In nearly all cases of venture capital investments in the West, the venture capital fund will bring in a team that either manages the business directly (“hands-on”) or carefully monitors the direction in which the business is being taken. Indeed, so important is this aspect of venture capitalism in the West that most advisers will tell entrepreneurs that if a venture capital fund is or not willing to undertake this role, and bring onboard the experience they have gained, then they should not select that venture capital fund as part of the deal. Given the limitations of mudaraba, a lot of scholars regard this as prohibited!

Author: Waseem R
Article Source: EzineArticles.com
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Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves.

Venture capitalists generally:

- Finance new and rapidly growing companies;
- Purchase equity securities;
- Assist in the development of new products or services;
- Add value to the company through active participation;
- Take higher risks with the expectation of higher rewards;
- Have a long-term orientation

When considering an investment, venture capitalists carefully screen the technical and business merits of the proposed company. Venture capitalists only invest in a small percentage of the businesses they review and have a long-term perspective. Going forward, they actively work with the company’s management by contributing their experience and business savvy gained from helping other companies with similar growth challenges.

Venture capitalists mitigate the risk of venture investing by developing a portfolio of young companies in a single venture fund. Many times they will co-invest with other professional venture capital firms. In addition, many venture partnership will manage multiple funds simultaneously. For decades, venture capitalists have nurtured the growth of America’s high technology and entrepreneurial communities resulting in significant job creation, economic growth and international competitiveness. Companies such as Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel, Microsoft and Genentech are famous examples of companies that received venture capital early in their development.

Private Equity Investing

Venture capital investing has grown from a small investment pool in the 1960s and early 1970s to a mainstream asset class that is a viable and significant part of the institutional and corporate investment portfolio. Recently, some investors have been referring to venture investing and buyout investing as “private equity investing.” This term can be confusing because some in the investment industry use the term “private equity” to refer only to buyout fund investing.

In any case, an institutional investor will allocate 2% to 3% of their institutional portfolio for investment in alternative assets such as private equity or venture capital as part of their overall asset allocation. Currently, over 50% of investments in venture capital/private equity comes from institutional public and private pension funds, with the balance coming from endowments, foundations, insurance companies, banks, individuals and other entities who seek to diversify their portfolio with this investment class.

What is a Venture Capitalist?

The typical person-on-the-street depiction of a venture capitalist is that of a wealthy financier who wants to fund start-up companies. The perception is that a person who develops a brand new change-the-world invention needs capital; thus, if they can’t get capital from a bank or from their own pockets, they enlist the help of a venture capitalist.

In truth, venture capital and private equity firms are pools of capital, typically organized as a limited partnership, that invests in companies that represent the opportunity for a high rate of return within five to seven years. The venture capitalist may look at several hundred investment opportunities before investing in only a few selected companies with favorable investment opportunities. Far from being simply passive financiers, venture capitalists foster growth in companies through their involvement in the management, strategic marketing and planning of their investee companies. They are entrepreneurs first and financiers second.

Even individuals may be venture capitalists. In the early days of venture capital investment, in the 1950s and 1960s, individual investors were the archetypal venture investor. While this type of individual investment did not totally disappear, the modern venture firm emerged as the dominant venture investment vehicle. However, in the last few years, individuals have again become a potent and increasingly larger part of the early stage start-up venture life cycle. These “angel investors” will mentor a company and provide needed capital and expertise to help develop companies. Angel investors may either be wealthy people with management expertise or retired business men and women who seek the opportunity for first-hand business development.

Investment Focus

Venture capitalists may be generalist or specialist investors depending on their investment strategy. Venture capitalists can be generalists, investing in various industry sectors, or various geographic locations, or various stages of a company’s life. Alternatively, they may be specialists in one or two industry sectors, or may seek to invest in only a localized geographic area.

Not all venture capitalists invest in “start-ups.” While venture firms will invest in companies that are in their initial start-up modes, venture capitalists will also invest in companies at various stages of the business life cycle. A venture capitalist may invest before there is a real product or company organized (so called “seed investing”), or may provide capital to start up a company in its first or second stages of development known as “early stage investing.” Also, the venture capitalist may provide needed financing to help a company grow beyond a critical mass to become more successful (“expansion stage financing”).

The venture capitalist may invest in a company throughout the company’s life cycle and therefore some funds focus on later stage investing by providing financing to help the company grow to a critical mass to attract public financing through a stock offering. Alternatively, the venture capitalist may help the company attract a merger or acquisition with another company by providing liquidity and exit for the company’s founders.

At the other end of the spectrum, some venture funds specialize in the acquisition, turnaround or recapitalization of public and private companies that represent favorable investment opportunities.

There are venture funds that will be broadly diversified and will invest in companies in various industry sectors as diverse as semiconductors, software, retailing and restaurants and others that may be specialists in only one technology.

While high technology investment makes up most of the venture investing in the U.S., and the venture industry gets a lot of attention for its high technology investments, venture capitalists also invest in companies such as construction, industrial products, business services, etc. There are several firms that have specialized in retail company investment and others that have a focus in investing only in “socially responsible” start-up endeavors.

Venture firms come in various sizes from small seed specialist firms of only a few million dollars under management to firms with over a billion dollars in invested capital around the world. The common denominator in all of these types of venture investing is that the venture capitalist is not a passive investor, but has an active and vested interest in guiding, leading and growing the companies they have invested in. They seek to add value through their experience in investing in tens and hundreds of companies.

Some venture firms are successful by creating synergies between the various companies they have invested in; for example one company that has a great software product, but does not have adequate distribution technology may be paired with another company or its management in the venture portfolio that has better distribution technology.

Length of Investment

Venture capitalists will help companies grow, but they eventually seek to exit the investment in three to seven years. An early stage investment make take seven to ten years to mature, while a later stage investment many only take a few years, so the appetite for the investment life cycle must be congruent with the limited partnerships’ appetite for liquidity. The venture investment is neither a short term nor a liquid investment, but an investment that must be made with careful diligence and expertise.

Types of Firms

There are several types of venture capital firms, but most mainstream firms invest their capital through funds organized as limited partnerships in which the venture capital firm serves as the general partner. The most common type of venture firm is an independent venture firm that has no affiliations with any other financial institution. These are called “private independent firms”. Venture firms may also be affiliates or subsidiaries of a commercial bank, investment bank or insurance company and make investments on behalf of outside investors or the parent firm’s clients. Still other firms may be subsidiaries of non-financial, industrial corporations making investments on behalf of the parent itself. These latter firms are typically called “direct investors” or “corporate venture investors.”

Other organizations may include government affiliated investment programs that help start up companies either through state, local or federal programs. One common vehicle is the Small Business Investment Company or SBIC program administered by the Small Business Administration, in which a venture capital firm may augment its own funds with federal funds and leverage its investment in qualified investee companies.

While the predominant form of organization is the limited partnership, in recent years the tax code has allowed the formation of either Limited Liability Partnerships, (“LLPs”), or Limited Liability Companies (“LLCs”), as alternative forms of organization. However, the limited partnership is still the predominant organizational form. The advantages and disadvantages of each has to do with liability, taxation issues and management responsibility.

The venture capital firm will organize its partnership as a pooled fund; that is, a fund made up of the general partner and the investors or limited partners. These funds are typically organized as fixed life partnerships, usually having a life of ten years. Each fund is capitalized by commitments of capital from the limited partners. Once the partnership has reached its target size, the partnership is closed to further investment from new investors or even existing investors so the fund has a fixed capital pool from which to make its investments.

Like a mutual fund company, a venture capital firm may have more than one fund in existence. A venture firm may raise another fund a few years after closing the first fund in order to continue to invest in companies and to provide more opportunities for existing and new investors. It is not uncommon to see a successful firm raise six or seven funds consecutively over the span of ten to fifteen years. Each fund is managed separately and has its own investors or limited partners and its own general partner. These funds’ investment strategy may be similar to other funds in the firm. However, the firm may have one fund with a specific focus and another with a different focus and yet another with a broadly diversified portfolio. This depends on the strategy and focus of the venture firm itself.

Corporate Venturing

One form of investing that was popular in the 1980s and is again very popular is corporate venturing. This is usually called “direct investing” in portfolio companies by venture capital programs or subsidiaries of nonfinancial corporations. These investment vehicles seek to find qualified investment opportunities that are congruent with the parent company’s strategic technology or that provide synergy or cost savings.

These corporate venturing programs may be loosely organized programs affiliated with existing business development programs or may be self-contained entities with a strategic charter and mission to make investments congruent with the parent’s strategic mission. There are some venture firms that specialize in advising, consulting and managing a corporation’s venturing program.

The typical distinction between corporate venturing and other types of venture investment vehicles is that corporate venturing is usually performed with corporate strategic objectives in mind while other venture investment vehicles typically have investment return or financial objectives as their primary goal. This may be a generalization as corporate venture programs are not immune to financial considerations, but the distinction can be made.

The other distinction of corporate venture programs is that they usually invest their parent’s capital while other venture investment vehicles invest outside investors’ capital.

Commitments and Fund Raising

The process that venture firms go through in seeking investment commitments from investors is typically called “fund raising.” This should not be confused with the actual investment in investee or “portfolio” companies by the venture capital firms, which is also sometimes called “fund raising” in some circles. The commitments of capital are raised from the investors during the formation of the fund. A venture firm will set out prospecting for investors with a target fund size. It will distribute a prospectus to potential investors and may take from several weeks to several months to raise the requisite capital. The fund will seek commitments of capital from institutional investors, endowments, foundations and individuals who seek to invest part of their portfolio in opportunities with a higher risk factor and commensurate opportunity for higher returns.

Because of the risk, length of investment and illiquidity involved in venture investing, and because the minimum commitment requirements are so high, venture capital fund investing is generally out of reach for the average individual. The venture fund will have from a few to almost 100 limited partners depending on the target size of the fund. Once the firm has raised enough commitments, it will start making investments in portfolio companies.

Capital Calls

Making investments in portfolio companies requires the venture firm to start “calling” its limited partners commitments. The firm will collect or “call” the needed investment capital from the limited partner in a series of tranches commonly known as “capital calls”. These capital calls from the limited partners to the venture fund are sometimes called “takedowns” or “paid-in capital.” Some years ago, the venture firm would “call” this capital down in three equal installments over a three year period. More recently, venture firms have synchronized their funding cycles and call their capital on an as-needed basis for investment.

Illiquidity

Limited partners make these investments in venture funds knowing that the investment will be long-term. It may take several years before the first investments starts to return proceeds; in many cases the invested capital may be tied up in an investment for seven to ten years. Limited partners understand that this illiquidity must be factored into their investment decision.

Other Types of Funds

Since venture firms are private firms, there is typically no way to exit before the partnership totally matures or expires. In recent years, a new form of venture firm has evolved: so-called “secondary” partnerships that specialize in purchasing the portfolios of investee company investments of an existing venture firm. This type of partnership provides some liquidity for the original investors. These secondary partnerships, expecting a large return, invest in what they consider to be undervalued companies.

Advisors and Fund of Funds

Evaluating which funds to invest in is akin to choosing a good stock manager or mutual fund, except the decision to invest is a long-term commitment. This investment decision takes considerable investment knowledge and time on the part of the limited partner investor. The larger institutions have investments in excess of 100 different venture capital and buyout funds and continually invest in new funds as they are formed.

Some limited partner investors may have neither the resources nor the expertise to manage and invest in many funds and thus, may seek to delegate this decision to an investment advisor or so-called “gatekeeper”. This advisor will pool the assets of its various clients and invest these proceeds as a limited partner into a venture or buyout fund currently raising capital. Alternatively, an investor may invest in a “fund of funds,” which is a partnership organized to invest in other partnerships, thus providing the limited partner investor with added diversification and the ability to invest smaller amounts into a variety of funds.

Disbursements

The investment by venture funds into investee portfolio companies is called “disbursements”. A company will receive capital in one or more rounds of financing. A venture firm may make these disbursements by itself or in many cases will co-invest in a company with other venture firms (“co-investment” or “syndication”). This syndication provides more capital resources for the investee company. Firms co-invest because the company investment is congruent with the investment strategies of various venture firms and each firm will bring some competitive advantage to the investment.

The venture firm will provide capital and management expertise and will usually also take a seat on the board of the company to ensure that the investment has the best chance of being successful. A portfolio company may receive one round, or in many cases, several rounds of venture financing in its life as needed. A venture firm may not invest all of its committed capital, but will reserve some capital for later investment in some of its successful companies with additional capital needs.

Exits

Depending on the investment focus and strategy of the venture firm, it will seek to exit the investment in the portfolio company within three to five years of the initial investment. While the initial public offering may be the most glamourous and heralded type of exit for the venture capitalist and owners of the company, most successful exits of venture investments occur through a merger or acquisition of the company by either the original founders or another company. Again, the expertise of the venture firm in successfully exiting its investment will dictate the success of the exit for themselves and the owner of the company.

IPO

The initial public offering is the most glamourous and visible type of exit for a venture investment. In recent years technology IPOs have been in the limelight during the IPO boom of the last six years. At public offering, the venture firm is considered an insider and will receive stock in the company, but the firm is regulated and restricted in how that stock can be sold or liquidated for several years. Once this stock is freely tradable, usually after about two years, the venture fund will distribute this stock or cash to its limited partner investor who may then manage the public stock as a regular stock holding or may liquidate it upon receipt. Over the last twenty-five years, almost 3000 companies financed by venture funds have gone public.

Mergers and Acquisitions

Mergers and acquisitions represent the most common type of successful exit for venture investments. In the case of a merger or acquisition, the venture firm will receive stock or cash from the acquiring company and the venture investor will distribute the proceeds from the sale to its limited partners.

Valuations

Like a mutual fund, each venture fund has a net asset value, or the value of an investor’s holdings in that fund at any given time. However, unlike a mutual fund, this value is not determined through a public market transaction, but through a valuation of the underlying portfolio. Remember, the investment is illiquid and at any point, the partnership may have both private companies and the stock of public companies in its portfolio. These public stocks are usually subject to restrictions for a holding period and are thus subject to a liquidity discount in the portfolio valuation.

Each company is valued at an agreed-upon value between the venture firms when invested in by the venture fund or funds. In subsequent quarters, the venture investor will usually keep this valuation intact until a material event occurs to change the value. Venture investors try to conservatively value their investments using guidelines or standard industry practices and by terms outlined in the prospectus of the fund. The venture investor is usually conservative in the valuation of companies, but it is common to find that early stage funds may have an even more conservative valuation of their companies due to the long lives of their investments when compared to other funds with shorter investment cycles.

Management Fees

As an investment manager, the general partner will typically charge a management fee to cover the costs of managing the committed capital. The management fee will usually be paid quarterly for the life of the fund or it may be tapered or curtailed in the later stages of a fund’s life. This is most often negotiated with investors upon formation of the fund in the terms and conditions of the investment.

Carried Interest

“Carried interest” is the term used to denote the profit split of proceeds to the general partner. This is the general partners’ fee for carrying the management responsibility plus all the liability and for providing the needed expertise to successfully manage the investment. There are as many variations of this profit split both in the size and how it is calculated and accrued as there are firms.

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Author: Jason Tapolci
Article Source: EzineArticles.com
Provided by: Guest blogger