What is the minimum VC fund?
Minimum investment amounts in VC funds vary widely, depending on the fund's size, strategy, and target investor base. They typically range from a few hundred thousand to several million dollars.
The average minimum investment of a typical "venture capitalist" is $50,000. This is because the typical venture capitalist is an institutional investor, such as a pension fund or insurance company, that invests in startups in exchange for a share of the profits.
Many venture capitalists will stick with investing in companies that operate in industries with which they are familiar. Their decisions will be based on deep-dive research. In order to activate this process and really make an impact, you will need between $1 million and $5 million.
The topline: The optimal venture fund size is $200 million to $350 million, according to Santé's new analysis. These funds are able to generate higher returns via typical exits. This is a change from the optimal fund size (from below $200 million to $250 million) in the firm's 2011 analysis.
VCs don't actually care about market size, they care about exit size (an exit is where a company is sold or publicly listed). For reasons outlined in countless articles, venture funds need a few of the companies they invest in to exit for $1bn or more for their funds to be successful.
100/10/1 Rule - Investor screens 100 projects, finance 10 of them, and be lucky & able to enough to find the 1 successful one. Sudden Death Risk - Where the founder stops/loses capability to work on the idea. Investors usually choose the incubator strategy to avoid this risk.
Today, we'll explore the question: what are your VC's return expectations depending on the stage of investment? The TLDR; seed investors shoot for a 100x return; Series A investors need an investment to return 10x to 15x and later stage investors aim for 3x to 5x multiple of money.
Top VCs are typically looking to return 3-5X+ on their entire fund to their LP investors over ~10 years. For this, they need multiple 'fund mover' outcomes in each fund, since many early-stage investments will eventually fail or return only a small % of the fund.
They expect a return of between 25% and 35% per year over the lifetime of the investment. Because these investments represent such a tiny part of the institutional investors' portfolios, venture capitalists have a lot of latitude.
Venture capital funds typically have long tenures, beginning the first closing and running for 8-10 years. Fund managers usually seek pre-determined extension periods (2-3 years for example) to allow them for a smooth exit from all investments. Early termination is also possible, based on certain trigger events.
What is the 80 20 rule in VC?
The most experienced and successful venture capitalists grok the concept of the power law and how it describes the outcomes of startup investments. Simply put, 80% of the returns come from 20% of the deals.
VCs often use the shorthand phrase “two and twenty” to refer to the 2% of annual management fees a venture fund might take and the 20% carried interest (or “performance fee”) it would charge.
VCs need homeruns if they want to succeed. VCs finance very few home runs. Even the top VCs fail on about 80% - 90% if their ventures, according to one of the most successful VCs in the U.S. The top 2% earn high returns because they finance home runs.
For instance, the average size of new Corporate Venture Capital (CVC) funds in 2021 was approximately $91 million, with a median size of $50 million2 . On the other hand, a typical VC firm manages about $207 million in venture capital per year for its investors3 .
Venture capitalists make money from the carried interest of their investments, as well as management fees. Most VC firms collect about 20% of the profits from the private equity fund, while the rest goes to their limited partners.
Larger VCs target acquiring and maintain a minimum of 20–30% of any portfolio company. Micro VCs will own as much as they can of a deal but are typically targeting 10–15% ownership unless they are investing the very first money in a company in which case, they could have a higher ownership target.
Most larger VC firms ($250m-$2b fund size) want to own 20% of each investment. They'll even often pay a higher price to get that ownership, if need be. Your existing investors will want to do some or all of their pro rata, especially if a good Series A investor comes in.
My simple advice when you raise capital: assume you have to return a liquidity event (sale or IPO) of at least 10x the amount you raise for raising venture capital to be worth it. Valuations change from round to round. Later stage investors will expect lower ROI, seed investors will be looking for a lot more.
The Rule of 120 (previously known as the Rule of 100) says that subtracting your age from 120 will give you an idea of the weight percentage for equities in your portfolio.
Junior Partners are likely to earn around the $500K level (or less), with General Partners in the $500K – $1 million range in terms of salary + year-end bonus. And it's possible to earn less than $500K or more than $2 million; these are more like the 25th and 75th percentile markers, not absolute min/max numbers.
What is a 2 and 20 fee structure?
The 2 and 20 is a hedge fund compensation structure consisting of a management fee and a performance fee. 2% represents a management fee which is applied to the total assets under management. A 20% performance fee is charged on the profits that the hedge fund generates, beyond a specified minimum threshold.
According to a study by Crunchbase, only 0.05% of startups that apply for venture capital funding actually receive it. There are a number of reasons why raising venture capital is so difficult. First, VCs are looking for startups that have a high potential for growth and success.
In venture capital, LPs typically expect a fund's net IRR to reach at least 20% by the time a fund has exited all of its investments. Other asset classes, such as public equities, private equity, and real estate have differing IRR expectations.
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.
US Venture Capital has beaten the S&P 500's IRR by 19% over the last 25 years. Yet returns among VC investors vary wildly, because of the wrong approach. Here's how to build a startup portfolio that gives you consistent and stable returns: 1.
