What is a Venture Fund
A venture fund is an organization typically comprising a general managing partner and the investors who have contributed funds. The general partner makes all major decisions regarding the subsequent allocation of money and has the authority to do so without consulting the other members of the community.
The managing partner selects the investment targets, allocates funds, and later withdraws money along with profits. Consequently, the income is distributed among all participants in pre-established proportions based on their shares.
At the same time, the general partner shares the risks with the other members by also acting as an investor. The amount invested can vary, but it often constitutes at least 1%, with the general investor's stake typically being 4-5%.
The general managing partner, like all other participants, receives a share of the profits, in addition to a fee for fulfilling their duties. This remuneration ranges from 2% to 3%, while the profit share can exceed 20%.
However, this does not mean that participants passively observe the process, merely receiving profits or incurring losses. They have voting rights and can exert influence on the manager through a supervisory board.
The primary task of the manager is to identify projects capable of generating significant returns. With proper investment, a venture fund can yield annual returns of 30% for investors.
Initially, the fund distributes the principal investment back to all investors, and only thereafter is the remaining sum divided among the participants.
On average, such organizations operate for no longer than 10 years, with the typical lifespan being between 5 to 7 years. In rare cases, a company may last no longer than 1 year. The duration depends on the success of the management and the enterprise as a whole. The fund's focus also impacts its longevity.
Some organizations reinvest the profit earned into new projects, gradually increasing income. This approach allows investors to recover their initial contributions while using only the profits for further investments. Such funds can operate indefinitely and are referred to as evergreen funds.
Investment Characteristics of Venture Funds
Investing funds through this instrument has several unique features:
- Investments by stakeholders are made gradually, meaning there is no immediate need to contribute a large sum all at once.
- The funds subsequently represent a stake in the investments made in specific projects.
- The general manager notifies venture fund participants in advance about which project the funds will be allocated to and when the payment will occur, ensuring no payments are made before this notification.
- Not all projects yield returns for investors. Typically, only 30-40% of investments prove successful, allowing for both the recovery of invested capital and a modest profit. Merely 10-20% of projects can deliver significant profits, while a third of investments fail entirely. Therefore, the manager's responsibility is to identify avenues for returns that can exceed investment amounts by 5-10 times to cover losses from unsuccessful investments.
- Returns are generally paid to investors once a year, calculated based on the duration of investments and the volume of profits received.
- It is advisable to invest in projects that are in the early sales stages, as such companies are often deemed viable and the investments relatively low-risk. Sergey Tereshkin does not recommend investing at the earliest stages, as these projects may fail before even reaching initial sales.
The most lucrative investments are those with high risk. However, seasoned investors tend to steer clear of such funds. It is typically much safer to invest in low-risk companies. Although they may not provide enormous returns, they reduce the likelihood of complete loss of investor capital.
Identifying Promising Projects
The search for promising projects for investment is no easy task. To this end, many venture funds build extensive networks. The general manager and investors attend various specialized events where they forge connections. Some organizations boast networks comprising hundreds of partners from different countries, allowing them to invest in companies across various nations.
Successful venture funds readily share contacts and projects with other firms. They possess up-to-date information about promising enterprises and their current status, often leveraging personal connections. The possibility of purchasing information exists, albeit it can be legally dubious. However, it can help mitigate financial losses.
Unethical funds may pass information about deliberately failed projects to competitors. This practice removes even promising venture funds from the market. Such organizations face blacklisting for unfair competition. Negative information about a fund's reputation adversely affects its operations, making it unlikely for professional investors to entrust their capital to such entities. Consequently, this behavior is detrimental to all parties involved.
A venture fund represents a reliable method of investing capital. The key is to approach the selection process responsibly, favoring only reputable companies.
