Creating A Venture Capital Fund

Learn how to start your own business, how to "create a venture capital fund," and what it takes to be a founding general partner. What it means to be the founding general partner, and what investors expect of you in this role.

If you're considering starting and raising your own venture capital fund, you could already work for a venture capital firm or be an angel investor. Perhaps you work for a technology company or a non-profit organization that is not part of the startup environment. Regardless of where you start, it's vital to understand the ecosystem you're joining.

What is the process of creating a venture capital fund

Venture capital (VC) is an investing approach in which investors provide funding to early-stage private companies or startups in exchange for ownership holdings. Investors anticipate that startups will grow in value over time, enabling them to profit from selling their stake in the company at a liquidity event.

To achieve these goals, venture capital investors pool their own resources with outside money to invest in companies. Venture capitalists (VCs) are known as general partners (GPs), and outside investors as limited partners (LPs).The VCs formed asset management firms to handle all of the funds they created.

Read also: The Ultimate Guide to Small Business Startup Funding

VC firm or VC fund

Venture capital enterprises vary from venture capital funds.The VC business oversees the VCs' investing plans. When you hear the term "VC brand," you immediately think of this business. The management business leases office space, hires investment analysts, and subscribes to financial publications. Successful venture enterprises may run many VC funds at the same time—Fund I, Fund II, and so on.

The VC fund is a legal organization that pools cash to invest in assets such as businesses and uses its own investing strategy. The fund then stores the assets until they are sold.

How can I create a venture capital firm

We'll go over how to start a new venture capital business in the following phases before raising your first fund.

Step 1: Know your track record

Your track record represents your previous investing performance, including the types of investments made, the reasons for making them, and the returns obtained. Prospective LPs have a number of enterprises and funds to choose from. TVPI, MOIC, and IRR are investment performance metrics used to evaluate success potential.

If you are launching your first company or fund, you will not be able to reference past fund data. To demonstrate to LPs that they have what it takes to succeed, first-time fund managers may develop a track record in a variety of ways:

• Angel investing: If you're starting your first firm or fund, you won't be able to use previous fund data. To show to LPs that they have what it takes to succeed, first-time fund managers may build a track record using a number of ways.

• SPVs: Making several angel investments may result in a portfolio equivalent to a personal venture fund.

• Warehousing investments: Angel investments may be in any quantity, however they are usually about $100,000.Fund managers may employ special-purpose vehicles (SPVs) to get access to transactions.

Read also: Synopsis, Tax Consequences, and Illustrations: Exit Obstacles

Step 2: Partner up

You can start a venture capital firm on your own, but having someone who can supplement your own skills may be beneficial in the beginning. For example, if you have extensive operational expertise as a prior COO, you may work with someone who specializes in finance or technology.

From there, you may decide how you'll pay yourself, where your office will be, what equipment you'll need, and who you'll hire next.

The founding general partner role

As a fund manager, you will be both an entrepreneur operating your own firm and a fiduciary for external money. Your tasks will involve recruiting businesses and founders, engaging with limited partners, developing a portfolio, executing agreements, and managing money.

That's why it's important to start with the following (albeit not a comprehensive list):

• A compelling investment proposition.
• Good relationship with the founders.
• Business or industrial expertise.
• A competitive endeavor to reach agreements.
• A prudent portfolio building strategy.
• Excellent network skills.
• Have patience.
• The ability to articulate why your fund is unique.
• A willingness to contribute financially.

Step 3: Determine your VC firm’s structure

Limited partnerships and limited liability companies (LLCs) are used to facilitate contacts between venture capitalists and third-party investors, as well as to carry out the VC firm's activities.

Limited liability companies (LLCs)

VC companies are often structured as LLCs, which enable participants to benefit from limited liability and pass-through taxes. The separation of legal entities limits accountability to individual businesses rather than exposing VC cashflows and assets to liabilities from any fund. This suggests that if one of a company's funds fails, it typically has minimal impact on the company's remaining funds.

VC companies then formed separate LLCs to act as the general partner corporations for each venture fund. (Most fund managers are members of the GP LLC organization.)

While management companies are often formed as LLCs, the internal structure may vary depending on the VC firm's operational preferences, such as team, overhead, and platform activities. Because the same people inside a management company may give services to many funds, the management firm will be dispersed throughout multiple funds.

Read also: Side Pocket Definition, How It Works, Pros and Cons

Step 4: Fundraise and set up your fund.

To start your first fund, you'll need access to a pool of money that may be utilized for investments. VCs often raise capital by asking contributions from other investors. These external investors become limited partners in the fund.

Your fund's LPs will remain passive, but you, as the fund manager, will make daily investment decisions. Limited partners become investors in your fund after signing and submitting a limited partnership agreement outlining their relationship with the fund.

Step 5: Bring the resources back in.

As the fund's general partner, the LLC you founded to oversee its operations has the legal authority to hire service providers.In firms with many funds, the VC firm often acts as the management company for all of them. In other words, the fund's general partner hires the venture capital firm to handle fund administration tasks including hiring and paying investment specialists, acquiring office space and computers, and so on.

This enables the VC firm to pool its resources for the advantage of all funds it manages while shielding itself from liabilities.

Step 6: Operationalize your fund

The last step to starting your venture capital firm is identifying  the right service providers who can help support and launch your fund. 

This  might include:

• You may establish a bank account for your money.
• If your fund requires an audit, contact an audit company.
• A tax professional may assist in preparing tax paperwork.
• A lawyer may assist alter the LPA and negotiate with LPs.
• A fund administrator oversees all back-office operations for your fund.

FAQ's Creating A Venture Capital Fund

Can I start my own VC fund?

To launch a venture capital firm, you must first establish a track record. If you haven't previously made any solid investments, it will be difficult to build your own fund. Go to work for a fund initially and make some smart investments there.

How much does it cost to start a venture capital fund?

The process of establishing a fund varies based on the stage at which the fund want to invest, the sector or industry, and the performance targets for its portfolio firms. Full-time general partners generally need $20 million to $40 million per head in fund size to pay salary and overhead, assuming a 2% management fee.

How do I set up a venture capital fund?

1. Step one: Know your track record.
2. Step two: Partner up.
3. Step three: Determine your VC firm's structure.
4. Step four: Fundraise and form your fund.
5. Step five: Bring the resources back in.

How do I become a venture capital fund?

1. Gain relevant education. There are various academic approaches you can take to become a venture capitalist.
2. Get work experience.
3. Seek opportunities.
4. Identify a mentor.
5. Develop a network.