What is a Venture Capital Fund?


Companies that want to raise capital know that venture capital funds are one of the best ways to do so. But if you're wondering, "What is a venture capital fund?" — or you're interested in how you can start your own venture capital fund — you'll need a trusted and experienced partner to help you bring your offering to the world of private investments. 

What Are Venture Capital Funds?

Simply put, a venture capital fund is basically a pooled investment where someone or some entity manages the entirety of the investment on behalf of the investors. With enough capital, stakes could be purchased in small startups all the way to medium-sized enterprises that have the growth potential to maximize investment. While the investments themselves may be characterized as high-risk, the potential rewards are astronomical, and one big win could lead to a huge windfall for all investors involved.

Previously, venture capital fund formation was limited to professional venture capitalists, thereby squeezing out those that may want to participate in the venture capital market but that weren't able to quite figure out how to get their foot in the door. Today, venture capital funding is possible for accredited investors that want access to this lucrative and important market.

How Do Venture Capital Funds Work?

As private equity investment vehicles, venture capital funds work by giving equity financing to small and medium-sized companies that need to raise funding before they can think about turning a profit. Almost every growing company in Silicon Valley does this, including big names you've all heard of, and it's the important funding that allows them to grow quickly while establishing a hold in the market. 

Permitting companies to focus on growth rather than worrying about profits and losses, venture capital funds are investment vehicles that seek to help these growing enterprises overcome the challenges of starting out and helping them become big winners in the world of business. 

Venture capital funds are different from mutual funds and hedge funds that simply invest in company stock — they attempt to get in on the ground floor before those types of investments are made available to the general public. If you've ever heard of the secretary ending up a millionaire after a recent IPO, you've seen the power of getting in early at work. 

With longer investment horizons than typical stocks and other funds, venture capital funds allow investors to maximize the potential of their gains by helping them play an active role in tomorrow's big successes. Some funds may even provide guidance and hold a seat on the company's board, helping to shape management and operations in a way that is not possible outside of this type of direct investment.

But don't forget mitigating risk, which is a big part of running a venture capital fund. That's why instead of one bet, most venture capital funds place many smaller bets in anticipation that at least one or a few of them will pay off in the long run. 

Running a Venture Capital Fund

For those that are interested in starting a venture capital fund, you'll need significant administrative capabilities to raise capital, identify investment opportunities and generally manage the fund. Whether that's seed capital, early-stage capital or expansion-stage capital, a venture capital fund needs that all-important capital before they can become a player and make investments of their own.

One of the most important pieces is the prospectus, which tells potential investors what the fund does and how the resources will be committed. Those who choose to invest in the fund will help the fund establish a war chest for further investment downfield, which can help managers review business plans and other documentation to identify the best candidates for the fund's investments. 

After investments are made according to the prospectus and the expectations of the fund's investors, a venture capital fund will charge a small management fee to do most of the heavy lifting, allowing the investors themselves to sit passively while the fund managers work tirelessly to turn that investment into a large payday. Some funds may hinge their fees on returns earned, but the fees are necessary to help pay the salaries and expenses of everyone involved in actively managing the fund.

Interested in Starting Your Own Venture Capital Fund?

Those that are interested in starting their own venture capital funds need comprehensive administrative capabilities to make it all work. Here at Assure, we provide VC fund administration for the private investment community so that you can simplify your capital raising in a venture capital fund of your own.

In practice, our fast and affordable SPVs help you decrease traditional administration costs by more than 90 percent, and that means saving time and money for yourself, your fund's managers and your investors. That's because it can be difficult to launch and run a venture capital fund without properly structuring and administering the investment vehicles that are used to invest in private assets, whether they be start-up companies, real estate, cannabis, crypto-currency or any field that's expected to outperform the market over the long term.

Begin your SPV today or read more about us or our Glassboard product.

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