HOW A VENTURE CAPITAL FUND WORKS

Want to learn more about Venture Capital and Private Equity?

Here are some of the takeaways from Episode #60 of the Startup CPG Podcast with Wayne Wu of VMG Partners about how a venture capital fund works:

WHAT HAPPENS WHEN A FIRM DECIDES TO INVEST $10 MILLION OF THE FUND IN XYZ BRAND?

• Firm reaches out to all limited partners/investors committed to the fund

• If investor committed $10 million of $100 million fund (10%), they would need to send $1 million to invest in XYZ Brand (10%)

• Investor has X number of days to send in the $1 million

• Firm invests $300,000 of $10 million (3% of the fund represented by the firm)

• On exit: XYZ Brand sells and $20 million comes back to the fund (doubled the investment) - 20% of the gains go to the firm, 80% goes to investors

• Firm also makes return on their $300,000 investment - receives

$540,000 back ($240,000 additional gain since investment was doubled minus the 20% already received by the firm on gains)

What

DOES

A $100 MILLION FUND MEAN?

• $100 million is the total of commitments from individuals and institutions to invest $X in the next X number of years (example: 5 years to deploy capital, 5 years to harvest returns).

• Private equity firm represents small percentage of fund (example: 2-3%) with the firm's own $$. Other 9798% of funds from outside investors through commitments.

• Firm makes money on % of gains returned to investors (example: 20%) and through their own 2-3% investment.

LEARN MORE ABOUT VC & PE ON THE STARTUP CPG PODCAST, AND CHECK OUT OUR OTHER EPISODES ON ANGEL INVESTING, CROWDFUNDING AND MORE

By Jenna Movsowitz