If there is one thing emerging enterprises are grateful for, it is venture investment funds. They have filled the gap between the sources of funds for innovation and the traditional sources of capital.
This sector exists because of the structure and rules of capital markets.
People with ideas or new technologies often have no other institution to turn to so, they seek funding from them.
What then are venture investment funds?
Venture investment funds are private equity investment drivers that invest in firms that have high risk and/or high return profiles based on the firms’ assets, product development stage and size.
In simpler terms, they give companies the means to raise funds before they begin operation or start earning profits.
Also read, Top 5 African Venture Capital Firms
They mostly seek private equity stakes in early-stage enterprises and startups with great growth potentials.
They generally 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.
Investors in venture investment funds are typically very large institutions such as pension funds, financial firms, insurance companies, etc., who put a small percentage of their total funds into high-risk investments.
The decision to invest usually stems from the prospect’s track record, fund story, and confidence in the partners.
Venture investment funds have, to an extent, become accessible to licensed investors as opposed to the past when they were only available to professional venture capitalists.
Venture investment funds play active roles in their investments by being part of the board, providing guidance and managing the operations of the enterprises in their portfolio.
The fund’s managers search for potential great-growth companies by reviewing series of business plans and making investment decisions based on the prospect’s mandate and expectation from investors.
The fund then charges annual management which covers salaries and investment of the partners.
Also read, 5 Industries Attracting Venture Capital Firms In Africa
Investors make a profit when a company from their portfolio exits either through an IPO or a merger and acquisition.
If profit is made off the exit, the fund also keeps a percentage of the profits – usually around 20% – in addition to the annual management fee.
Venture investment funds usually aim for a gross internal rate of return around 30%, although the expected profit differs based on sector and risk profile.
So, if you’re a startup looking for seed to kick start, you might want to consider venture investments.
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