Getting the right VC investors can start the company on the right foot and help it gain powerful partners and funding. Less than 1 percent of all startups land a deal with a VC fund. Not every startup uses VC funding, however. In 2013, VC funding totaled almost $11 billion, which was a 17 percent increase from the year before. Startups have been raising more money lately. This includes popular apps and services like Uber and Lyft. Many devices, apps, and services that people use daily began with VC funding. Expected return varies based on the economic state and the type of portfolio companies, but most VC funds aim for a gross return of around 30 percent. The fund maintains a portion of the profits when a company exits, which usually equals around 20 percent.This either happens through an IPO or if the company merges or is acquired by a larger company. Returns are given to investors of the VC fund when the company leaves the fund.Some large funds only charge for invested capital or lower their fees once investments have lasted more than a few years. Once an investment is finalized, most funds charge an annual fee of around 2 percent, which helps pay the salaries of firm directors and other operating costs.Fund managers make the final decisions based on what the investors expect. This process can take a long time and often requires sorting through hundreds of business plans to find the companies with the highest growth potential. ![]() The VC fund looks for private equity investments that can bring in positive returns.The fund's operators secure each investment. The fund sends a prospectus to potential investors who then decide if they want to add money to the fund or not. VC funds raise money before they can make any investments.No matter what stage the investment is in, they all follow the same basic process: How Do VC Funds Work?ĭepending on how mature the business is when the investment occurs, VC investments are classified as either seed capital, early-stage capital, or expansion-stage capital. Spreading out the capital helps the funds lessen some of the risk that comes with investing in new companies. ![]() It is common for a VC fund to invest smaller amounts of money in a larger number of startups in hopes that at least a few of the companies will grow into larger, profitable companies. Venture capital firms typically take an active role with their investments and often request a seat on the board, so they can provide more guidance. ![]() ![]() Changes in the investing world have made venture capital investments more accessible to a wider variety of legitimate investors. Compared to other types of investments like hedge funds or mutual funds, venture capital funds focus only on early-stage investments. Investors look at a company's size, assets, and product development pipeline when choosing their VC investment. Most venture capital investments are considered to be high risk / high reward opportunities. VC funding is one way for small businesses to get money to start or grow their business. These groups oversee the money of investors who want to invest in companies with strong growth potential in exchange for an equity share in the business. Entrepreneurs commonly ask, “What is VC funding?” The short answer is venture capital funding, or VC funding, is capital that you get from investment groups that work with startups and small businesses.
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