The process of raising funds for a Venture Capital fund involves an extensive process that takes several years. During the fundraising process, VC firms often make a “first close” after reaching 25 percent to 50 percent of their target amount. Moreover, they usually invest funds before the final close. The most common structure for VC funds is a 2-20 structure. LPs pay a 2% management fee to cover firm costs. The VCs take 20% of profits as a carry. However, if the investment is successful, LPs will have to compensate the VCs with 20% of their own earnings.
The first major fundraising year for the venture capital industry was in 1978. This year, more than $750 million was raised. Before this time, however, many private companies were inaccessible to investors because of the Employee Retirement Income Security Act (ERISA). The US Labor Department loosened ERISA restrictions in 1978, allowing some investments in privately held companies to be made. As a result, corporate pension funds were a major source of venture capitalists’ money. In March 2000, the NASDAQ Composite index reached a record high of 5,048.
Since the advent of ERISA in 1978, venture capitalists have become one of the largest sources of capital. During that time, the US Labor Department had loosened the rules that limited these investments. Investors could no longer make investments in private companies if they were subject to the ERISA regulations. Therefore, many corporate pension funds became the major source of capital for the venture capital industry. Furthermore, a recent study conducted by a University of Southern California has shown that the number of startups soaring to five-figure levels is a result of increased risk.
The first major fundraising year for venture capital was in 1978. In that year, venture capitalists raised $750 million. Before this time, the Employee Retirement Income Security Act (ERISA) had restricted many investments in privately held companies. Fortunately, the US Labor Department relaxed this restriction under the “prudent man” rule. This allowed the venture capital industry to attract investors. By March 2000, the NASDAQ Composite Index reached a record high of 5,048.
Aside from venture capitalists, corporations and universities are also popular sources of capital for startups. The majority of new companies that are funded by the Venture Capital industry have undergone the first major fundraising year in 1978. By contrast, the total funding amount has increased threefold since then. In fact, by contrast, in 2008, most businesses raised $750 million. In both years, the NASDAQ Composite index peaked at five-digit levels by March 2000.
VCs want to know the break-even point of the business. The more detailed the business, the more likely it is that it will succeed. It is crucial that the entrepreneur has a proven track record in the industry. Similarly, the entrepreneur must be a professional in the field. As a result, the VC should have experience in the industry. The VC’s pay structure may limit the entrepreneur’s upside in the company.
