Venture capital funds are designed to generate returns by investing in entrepreneurs and start-up businesses with the potential for high growth and significant value creation. It is the riskiest strategy within the private equity asset class, but also the one with the greatest return potential.
FINANCING INNOVATIVE GROWTH
Venture capital fund managers are focused on funding early-stage innovation and are a key financing source in helping businesses that are starting to commercialize a new product or service. Fund managers often source investment opportunities from their existing networks of entrepreneurs and executives, directly from research universities or through startup incubators or accelerators. Within a venture capital portfolio, there is an expectation that many start-ups will fail and a small number of highly successful investments will drive the bulk of returns across the portfolio.
INVESTMENT PROCESS
VENTURE CAPITAL CATEGORIES
The different stages of venture capital come with different risks and return characteristics. These stages include, but are not limited to:
We consider seed as initial funding, followed by funding rounds in specific series with early-stage representing series A or B financing; late-stage as series C or D; and venture growth as series E or later.
BENEFITS
Venture capital has a history of outsized returns with manager selection as a key factor of performance.
Private markets, largely pre-IPO investments, are increasingly capturing a greater portion of value creation as companies accept more venture funding and stay private for longer.
Venture capital is the closest proxy to innovation and has financed some of the highest growth and most disruptive companies.
Venture capital offers access to a vast opportunity set, new market categories and high-growth sectors such as technology and biotech.
Venture capital firms can help create value in a mentorship capacity, often with operating partners.
KEY RISK CONSIDERATIONS
Key risk considerations may include, but are not limited to, the following:
Manager Selection: Top quartile venture funds have demonstrated significant outperformance, illustrating the importance of manager selection.
Liquidity: Investments typically involve long holding periods and are subject to the health of the exit environment.
Speculative: Venture is a high-risk, high-reward investment strategy where many investments may fail and performance is derived from a small number of successful investments.
Cyclical: Venture capital can be exposed to high cyclicality illustrated by investment periods through the semiconductor, internet dot-com, web 2.0 and artificial intelligence eras.
IMPORTANT INFORMAITON
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