An overview of the different stages of a venture capital fund.
A venture capital fund goes through three stages: Fundraising, investment and disinvestment. General Partners (GPs) - the management of a VC fund - establish the VC company and raise a fund with capital from limited partners (LPs). The GPs then invest the collected capital provided by the LPs and manage the portfolio companies. Due to the limited natures of the fund, a disinvestment, or exit, from the ventures is necessary at some point in time.
1. phase: Establishment & Fundraising
The GPs incorporate a company with a new VC fund.
GPs must provide around 5% of the targeted fund volume themselves to ensure incentives alignment with LPs.
The remaining ~95% of the required capital is contributed by LPs.
To raise the fund, VCs prepare a Pitch Deck and undertake a roadshow.
Once about 50% of the targeted fund volume is collected, VCs start investing.
2. phase: Investment & Portfolio Management
- GPs invest raised capital in selected startups
- Committed LPs must participate in “capital call” and provide the capital for investment
- Capital allocation usually takes place within the first 5-7 years of the VC lifecycle
- GPs support the startups they invested in with knowledge, network and operational support
- If necessary, the GPs organize and manage follow-up investments
3. phase: Disinvestment
VC funds are managed for only a limited period. Hence, a disinvestment from the ventures is necessary at some point.
The GPs will push their portfolio companies towards an exit-route.
The proceeds are repaid to the LPs except for the retention of ~ 20% of profits (“carried interest”) by the GPs.
Positive scenario: Profitable exit via M&A, IPO or SPAC
Negative scenario: Bankruptcy and liquidation
Family of Funds
After successfully collecting the first fund, VCs will look for new investment opportunities. VCs usually start raising a new fund once ~ 70% of the current fund has been allocated and positive development of portfolio ventures can be observed.
If you want to learn more about venture capital financing, you should read our comprehensive guide on this topic: Venture capital funding: A beginners guide
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