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. It is very convenient for young start-ups.
They are less complicated in the perspective of entrepreneurs and other small companies when raising funds. Nevertheless, attention must be made to the procedures that entrepreneurs need to do before and during the agreement.
So they will demand a proper business plan and they will evaluate the project in terms of expertise and innovation. After an investment is made, the fund charges a management fee. They usually are around 2%, and some funds may not charge a fee. It is important to mention that fees for large funds may only be charged on invested capital or decline after a certain number of years. On the other hand, the expected return varies based on industry and risk profile, venture capital funds typically aim for a gross internal rate of return around 30%.
However, these venture capital investments not only address young start-ups, they also address seed capital, early-stage capital or expansion-stage financing depending on the maturity of the business. Regardless your case if you are granted with their funds the operation is almost in the same way.
As it is a consortium of individual investors, first venture capital must raise money so this means that they will look for potential investors. Then some of them will commit money to that fund and individual investment amounts are finalized. After this, venture capital funds seek for business models that have the potential of generating positive returns for its investors. These funds review thousands of business plans in search of potentially high-growth companies so you really need to work on your business plan to make it attractive and stand up from the others. The fund managers make investment decisions based on the prospectus and the expectations of the fund’s investors.