what are venture capital funds 
venture capital funds are pooled investment funds that manage the money of investors who seek private equity stakes in startups and small to medium sized enterprises with strong growth potential these investments are generally characterized as very high risk high return opportunities in the past venture capital vc investments were only accessible to professional venture capitalists but now accredited investors have a greater ability to take part in venture capital investments still vc funds remain largely out of reach to ordinary investors understanding venture capital fundsventure capital vc is a type of equity financing that gives entrepreneurial or other small companies the ability to raise funding before they have begun operations or started earning revenues or profits venture capital funds are private equity investment vehicles that seek to invest in firms that have high risk high return profiles based on a company s size assets and stage of product development venture capital funds differ fundamentally from mutual funds and hedge funds in that they focus on a very specific type of early stage investment all firms that receive venture capital investments have high growth potential are risky and have a long investment horizon venture capital funds take a more active role in their investments by providing guidance and often holding a board seat vc funds therefore play an active and hands on role in the management and operations of the companies in their portfolio venture capital funds have portfolio returns that tend to resemble a barbell approach to investing many of these funds make small bets on a wide variety of young startups believing that at least one will achieve high growth and reward the fund with a comparatively large payout at the end this allows the fund to mitigate the risk that some investments will fold operating a venture capital fundventure capital investments are considered either seed capital early stage capital or expansion stage financing depending on the maturity of the business at the time of the investment however regardless of the investment stage all venture capital funds operate and are regulated in much the same way like all pooled investment funds venture capital funds must raise money from outside investors prior to making any investments of their own a prospectus is given to potential investors of the fund who then commit money to that fund all potential investors who make a commitment are called by the fund s operators and individual investment amounts are finalized from there the venture capital fund seeks private equity investments that have the potential of generating large positive returns for its investors this normally means the fund s manager or managers review hundreds of business plans in search of potentially high growth companies the fund managers make investment decisions based on the prospectus mandates and the expectations of the fund s investors after an investment is made the fund charges an annual management fee usually around 2 of assets under management aum but some funds may not charge a fee except as a percentage of returns earned the management fees help pay for the salaries and expenses of the general partner sometimes fees for large funds may only be charged on invested capital or decline after a certain number of years venture capital fund returnsinvestors of a venture capital fund make returns when a portfolio company exits either in an ipo or a merger and acquisition two and twenty or 2 and 20 is a common fee arrangement that is standard in venture capital and private equity the two means 2 of aum and twenty refers to the standard performance or incentive fee of 20 of profits made by the fund above a certain predefined benchmark if a profit is made off the exit the fund also keeps a percentage of the profits typically around 20 in addition to the annual management fee though the expected return varies based on industry and risk profile venture capital funds typically aim for a gross internal rate of return around 30 venture capital firms and fundsventure capitalists and venture capital firms fund several different types of businesses from dotcom companies to biotech and peer to peer finance companies they generally open up a fund take in money from high net worth individuals companies seeking alternative investments exposure and other venture funds then invest that money into a number of smaller startups known as the vc fund s portfolio companies venture capital funds are raising more money than ever before according to financial data and software company pitchbook the venture capital industry invested a record 136 5 billion in american startups by the end of 2019 1 the total number of venture capital deals for the year totaled nearly 11 000 an all time high pitchbook reported two recent deals included a 1 3 billion investment round into epic games as well as instacart s 871 0 million series f pitchbook also cited an increase in the size of funds with the median fund size rounding out to about 82 million while 11 funds closed out the year with 1 billion in commitments including those from tiger global bessemer partners and ggv 