Fund, Fund Me Do – 3

by Keith Basik on July 6, 2012

As mentioned in my first two blogs of Fund, Fund Me Do,  just like  The Beatle “Love, Love Me Do” song, “Funding”  is to the business world as “Love” is to the world of relationship.  Without funding and knowing how to get the funding, your great business idea (large or small) may never see the light of day.

In this blog, we will focus on Venture Capital money.

Venture Capital

Funding is the key to making money

Venture capital (VC) money is typically assembled by investment groups, who invest in young,growing companies.  In short, VC is an important source of equity for start-ups.

From a historical standpoint, with few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals and families. The Vanderbilts, Whitneys, Rockefellers, and Warburgs were notable investors in private companies in the first half of the century.  Before World War II, money orders (originally known as “development capital”) were primarily the domain of wealthy individuals and families. It was not until after World War II that what is considered today to be true private equity investments began to emerge marked by the founding of the first two venture capital firms in 1946: American Research and Development Corporation. (ARDC) and J.H. Whitney & Company.

As it stands now, A VC firm generally manages capital for a fund for 10-year period and oversees approximately 10-15 companies within the fund. The realize that they will not have a 100% success rate on their investments–typically a 10-20 percent success rate is expected; thus, in order to make money, their return most be high to overcome the failures they inevitably come across.  It is not cheap money.

FUNDING CYCLE

The expected Return on Investment (ROI) depends on where the VC firm views their  stage of participation.  Below gives a general idea of the various rounds and expect ROI:

  • Round One:               Start-up 60% IRR
  • Round Two:              Introduction 50% IRR
  • Round Three:           Expansion 40% IRR
  • Round Four:             Mezzanine 20% + IRR

The VC’s typical timeline for an investment is 3-5 years.

VCs are generally closely held corporation that can be funded by a myriad different groups:  private and public pensions funds, foundations, endowments,  foreign investors, etc.

Below are some additional perimeters that VCs follow:

  • Seek opportunities in a variety of industries
  • Purchase equity securities
  • Assist in the development of new products and services
  • Finance new and rapidly growing companies
  • Take higher risks with the expectation of higher rewards

In short, the VCs are not your first stopping point, but when other means of less expensive capital are not available, they are a great resource.

 

 

 

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