INVESTINVENTURE.COM
Frame of Venture Capital
Venture Capital Firms.
Venture capital firms are companies with the legal form of Societe Anonyme or partnerships, which set up venture capital funds, based on money from investors, in order to invest in small privately held companies in various industries (eg software, telecommunication, electronincs) which wish to find capital and develop an innovative business idea.
Venture Capital Fund(ing) and Investors Agreement.
The legal framework of the commitment between the venture capital fund and the investors, who wish to invest their money to the above fund, is described in an official Agreement or other legal documentation. The Agreement usually defines apart from the legal framework, the fund's area of investment and the terms and conditions for capital committed into the fund.
After the signing of the above Agreement the investors commit a certain amount to the fund.
Life of the Venture Capital fund.
The VC fund usually has a contractually limited life of eight to ten years, but it may be extended by two to three years.
Operation of the VC Fund.
When the Managers of the VC Fund finds an investment opportunity, they draw down from the pool of the committed capital. The main part of the capital of the pool is used during the first five years of the fund’s life during which the VC Funds are investing to various areas (industries). The company’s management is responsible for the day-to-day operations. Venture Capital Fund Managers are generally far more actively involved in the activities of their portfolio companies than the owners of publicly quoted companies.
Operation of the VC companies.
During the fund’s life, venture capital companies make disclosures and communication of relevant information to their investors. Usually there is regular reporting to investors, in accordance with the established industry standards - Reporting Guidelines and Valuation Guidelines- including substantial details about each of the portfolio companies and valuation of the fund’s portfolio at fair value.
Where and how VC Funds invest.
Venture Capital funds invest primarily in unlisted companies.(not listed to stock exchange). The total investment amount is not usually invested at once. Instead it is split into tranches and is conditional on various technical and/or commercial targets being met by the company in which the capital is invested. This process attracts amounts to be invested in the company from other sources than VC funds. Usually one venture capital firm, the lead investor, puts together a syndicate and leads an investment round. The union for a VC investment round usually comprises some or all of the existing investors from previous rounds and some new ones.
Exit from the unlisted companies.
The typical period during which the venture capital company is held in the VC funds portfolio of unlisted companies is between 3 to 7 years. Fund Managers try to exit from the unlisted companies during the fund’s life. Divestments of portfolio companies are typically made through an IPO (listing in a stock exchange) a Merger or Sale.
Distribution of realised profits from the VC companies.
The realised net profits of the VC Fund are distributed back to investors. Of course not all realised investments to unlisted companies bring profits into the VC Fund. The investor is making a placement of money, through the VC Fund, into unlisted companies, which might have plans for developing an innovative business idea, but it should be taken into account that these plans may be characterised by high risk but also by a promise for a high return to investors. The choice is yours.