Many first time entrepreneurs may not fully understand how a venture capital fund works and consequently may not fully relate to how VC’s function. This post makes an attempt to provide a generic overview of how a VC fund functions and what it implies for entrepreneurs.
To start with, it would help to understand similarities between VC’s and entrepreneurs. Just as entrepreneurs go through the cycles of opportunity, business plan, fund raising and eventual exit through IPO or M&A, VC’s also follow a similar cycle. VC’s identify the opportunity space in which they want to play and then develop a business plan. The business plan would broadly cover capital deployment strategies, time-frame for investing/exit, types of opportunities that would be considered for investing as well as target returns at the fund level. With this business plan, VC’s approach a set of qualified investors for raising the required funds for starting the VC fund. This fund raising effort is an intense and time consuming effort and closure can take anywhere from 12 months to 24 months depending on the size of the fund, team, past track record, nature of opportunities etc. Just as VC’s perform due diligence on the opportunities, prospective investors who are considering investing into the VC fund also perform detailed diligence on VC’s.
101 on How VC Industry Works [Must Read for all you Entrepreneurs]