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Venture capital funds are a type of private equity capital typically provided for early-stage, high-potential, growth companies in the interest of generating a return through an eventual realization event such as an IPO or sale of the company. Venture capital funds are generally invest by paying cash in exchange for shares in the invested company. It is typical for venture capital investors to identify and back companies in high technology industries such as biotechnology, Information Technology, and Communications.
The capital that makes up the investment pool of venture capital funds typically comes fom high net worth individuals and institutions.
The firms that manage where the venture capital funds put their money are usually comprised of small teams with technology experience, business experience, industry experience, or all three.
A core skill within venture capital funds is the ability to identify new and unique technologies that have commercial potential returns at an early stage.
Venture capital funds can also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital.
The payoffs in venture capital funds are highly skewed.
A very few make huge returns via an IPO or sale.
The rest mediocre or a complete loss.
This is why is absolutely necessasary to invest in start-up companies only through an experienced venture capital fund.
The investors money can be pooled with other investors and the risk can be spread through investing in many companies.
Venture capital funds are structured as limited parterships or limited liability companies.
Usually all of the capital is equity capital as most banks and the capital markets won't fund such investments.
Approaching a venture capital fund is an attractive option for new companies with a limited operating history because usually these types of companies cannot offer debt in the capital markets or get a bank loan.
The fees of a venture capital fund are usually 1 to 2% of assets under management and 20% of the annual profits of the venture capital fund.
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