# Venture Capital  ## VC Firm  - Venture Capital Firm - Varies between countries - Invest in a _venture capital fund_ - About 1k VC firms in the US. - Very difficult for those without a proven track record as entrepreneur or investor to form a VC form. - Two-thirds of the VC firms only launched one fund. - Venture capital prefers CSE, prefers software even more. - VC prefers 2B businesses. - _General Partners_ - Decides the industry to invest in - Normally 5 to 8 GPs, could be 1 - Arguments: should carried interest be subject to ordinary income or long term capital gain? - VC Firm and GPs seek to raise a fund. - May also put money in. - Receives _annual fee_, typically 2% of the value of the fund. - Also receives _carry_, a percentage of net profit (typically 20%) - Originates from sailing: you pay 20% commission for whatever carried in the ship. - Spend half of their time recruiting management and serving as directors/monitors. - _Limited Partners_ - Put money into the pool of fund. - Must wait for 10 to 12 years to see the return. ## The Profit - Aims for 25% to 35% of profit yearly over the life time of the VC fund. - A small number of VC funds generates the biggest return (multiple times) - Vast majority of return is generated by a few successful companies - Even the best VC firms, they lose money in 40% of the investments. - Every investment must have the potential to be the home run! > [!tip] Picking the Winners > > - Ideas are more malleable than people. > - Large addressable market size. > - Look for startups that grow exponentially without diminishing the marginal > costs. > - Look for _unfair_ product, [[business-model|business model]], and culture. > [!tip] 5 Essential Elements that Lead to Success > > - Ideas > - Team > - Business Model > - Funding > - Timing (most importatn) ## The Process - VC Firm & GP seek to raise a fund - GP selects startups - GP manages fund and more investments over fund life - GP manages [[ipo|IPO]] or purchase "exits" - Money were distributed among GP, LP, and other investors. [Limited Partnership: What It Is, Pros and Cons, How to Form One](https://www.investopedia.com/terms/l/limitedpartnership.asp) ## From Founder and Early Team Point of View  - Venture Funding Lifecycle - Discovery - Grants, Competition, Credit Cards - Validation - Crowd Sourcing, SBT, SBI - Customer Creation - Angels, Seed Funds - Company Building - Venture Capital - Founder equity splits - [Founders' Agreement Template](https://www.pandadoc.com/founders-agreement-template/) - one-year cliff, four-year vesting - Founder's Agreement - [[cap-table|Capitalization Table]] - [[mvp|Minimum Viable Product (= MVP)]] - [[stock-option|Stock Options]] - Incentive - Non-statutory ## Resources - [5 charts: Startups feel the squeeze in Q3 | PitchBook | 2023](https://pitchbook.com/news/articles/venture-monitor-charts-startup-exits?) - "The ratio of capital demand to supply has skyrocketed to its highest level in over a decade for later-stage startups." - IPO freeze, investors leaving the VC field, leading to a investors' market for VC funding. ## Positions - [[vc-analyst|VC Analyst]]