How long are venture capital funds?
Most VC funds are closed-end funds, which means they operate on a fixed time frame—usually 10 years—and with a fixed amount of capital. The vast majority of the fund's investment comes after the final close.
Most venture funds have a 10 year time horizon to invest all of their capital and then return the profits to the fund's investors. There are exceptions to this 10 year life cycle, but that is fairly standard.
Holding Periods
After the investment period, VCs enter the holding period, shifting their focus from making new investments to supporting and managing the fund's existing portfolio companies. This phase typically spans 5–7 years and frequently overlaps with fundraising for a new fund.
Or the VC might be stuck with whatever is left in the portfolio. The team at the ManCo will invest during the “investment period”, usually in the first 3 to 5 years. This is necessary to then let the companies mature 5–7 years before selling them.
Venture capital funding is a form of private equity investment where a business obtains long-term investment in exchange for a share of its equity.
And yet, despite all that cash flowing into VC-backed companies, twenty-five to thirty percent of them will fail. One in five fail by the end of their first year; only thirty percent will survive more than ten years.
Venture capital is a high-risk, high-reward type of investment, and there is no guarantee of success. While VC firms aim to identify the best opportunities and minimize risk, investing in startups and early-stage companies is inherently risky, and there is always the potential for loss of capital.
Typically, GPs close several investors at once on a specified closing date. A VC fund can hold one or more closings before it stops accepting pledged capital. After a fund's final close, the GPs do not accept new LPs—also called “subscribers”—to the fund. (While it's possible for funds to reopen, this is rare.)
As discussed in the question above, the Internal Rate of Return (IRR), also known as the Annual Rate of Return, for a venture fund should be in the 15% to 27% range.
Definition: The final close occurs when the VC firm has reached its target fund size or decides to close the fund, even if it falls short of the target. Purpose: At the final close, fundraising efforts officially conclude, and the VC firm has a clear picture of the total committed capital available for investments.
Do VCs outperform the S&P 500?
Higher return, higher risks
We can see from this data that during a span of 6 years, VC funds outperformed the S&P 500 index (8.4% vs 5.6%), offering a premium of 2.7%, which translates to 48% higher returns from VC investments as compared to S&P 500.
Almost 7 percent of VCs in the sample — 825 out of 12,195 — had founded a venture-capital-funded startup. Nearly 30 percent of these startups were successful, while about 12 percent were unsuccessful.
Venture capitalists make money from the carried interest of their investments, as well as management fees.
Compensation levels vary by firm size, carried interest, and title, so I'm going to estimate a very wide range of $500K – $2 million USD. In practical terms, this range means: Base salaries are probably in the low 6-figure-range at many firms ($200-$400K), at least for the GPs (Junior Partners may be lower).
The sharks are venture capitalists, meaning they are "self-made" millionaires and billionaires seeking lucrative business investment opportunities. While they are paid cast members of the show, they do rely on their own wealth in order to invest in the entrepreneurs' products and services.
How much do vc scout jobs pay per hour? $8.65 is the 25th percentile. Wages below this are outliers. $17.31 is the 75th percentile.
The “loss ratio” at early-stage VC firms is often around 40% by logo, and 20%-30% by dollars. In other words, 4/10 may go bankrupt or at least lose money … but since the winners tend to get more than the losers, in the end, maybe “only” 20%-30% of the fund is lost in losers.
The Consequences of a VC Backed Startup Failure
For starters, VCs may lose the money they invested in the failed startup, as well as any fees that were associated with the investment.
Fundraising at Lowest Level Since 2017
In fact, 2023 was the worst year for VC fundraising since 2017, when 662 funds raised only $46.8 billion. Without exit activity and the return of capital to limited partners, fundraising will continue to suffer.
Minimal Investment Is Expensive
These funds are typically only available to high-net-worth individuals and institutional investors. A hedge fund's minimum investment might range from $100,000 to $1 million. Venture capital funds usually require a minimum investment of $250,000 to $500,000 and sometimes higher.
Does VC outperform the market?
Several articles and research papers have been published on the PME and the comparison of VC versus public stock performance. These studies often show that top-tier Venture Capital funds outperform public markets, while the median or average VC fund may underperform.
Venture capital is absurdly hard to secure.
Stories of startups that raised VC funding seem to dominate financial headlines, but in reality only about five in 10,000 startup businesses receive venture funding — less than 0.05%, according to Fundera.
No repayment
Unlike loans requiring a personal guarantee, if your startup should fail, you are not obligated to repay venture capitalists. Likewise, there are no ongoing monthly loan repayments.
Venture capital (VC) investors may decide to sell their investment and exit a company. Alternatively, the company's management can buy the investor out (known as a 'repurchase'). Other exit strategies for investors include: sale of equity to another investor - secondary purchase.
The Mechanics of Venture Capital
Venture Capital operates through a high-risk, high-reward paradigm. VCs invest in businesses they believe have the potential for significant growth and returns. Unlike conventional loans, venture capital is typically exchanged for equity in the company.
