Venture Capital

For a venture capital fund to achieve aggregate returns, the equity stakes in portfolio start-ups must be cashed out within its 10-year term, although the target for such liquidity events is usually three to five years.

“For a fund to achieve aggregate returns, the equity stakes in the start-ups that form the portfolio must be cashed-out within its 10-year term, although the target for such 'liquidity events' is usually three to five years.”

Each venture capital fund's portfolio is assembled during its opening three years or so, with managers holding back a portion of capital for subsequent rounds of investment triggered by agreed milestones.

“Each fund's portfolio will be assembled during its opening three years or so, as managers identify the start-ups they wish to support and hold back a portion of capital for subsequent rounds of investment to be triggered by agreed milestones (Mason, 2009).”

Venture capital funds are typically 10-year fixed-term independent partnerships composed of limited partners, including wealthy individuals and institutional investors such as pension funds, insurance companies, endowments, banks and cash-rich corporations.

“Funds are typically 10-year fixed-term independent partnerships composed of so-called 'limited partners'; that is, those who invest in the fund, including wealthy individuals and institutional investors (pension funds, insurance companies, endowments, banks and cashrich corporations).”

Venture capital funds are managed by general partners who receive annual fees of 2-3% of a fund's value plus a 20-30% share of eventual returns.

“Funds are managed by 'general partners' who receive annual fees of 2-3% of a fund's value, plus a 20-30% share of eventual returns.”

Venture capital funds operate a high risk/high reward investment strategy.

“Venture capital funds operate a high risk/high reward investment strategy.”

The 2:6:2 rule governs venture capital funds: two investments will be losses, six will break-even, and only two will realise returns, but these home runs will be of such magnitude that the overall portfolio will outperform equity markets over the same period.

“This is encapsulated in the so-called '2:6:2 rule' governing venture capital funds: two investments will be losses, six will break-even, and only two will realise returns, but these 'home runs' will be of such an order of magnitude that the overall portfolio will generate returns that outperform equity markets over the same period (Mason, 2009).”

When capitalising on unproven start-up firms with rapid growth potential in return for equity stakes, venture capital fund portfolios are expected to contain only a minority of investments that will ultimately pay off.

“When capitalising on unproven start-up firms with a rapid growth potential in return for equity stakes, fund portfolios are expected to contain only a minority of investments that will ultimately payoff.”