The lifecycle of a VC fund can be defined by three periods. The first is the fundraising period, which typically runs up to two years.
A new VC fund is created from an idea among a single or small group of investors known as general partners that have decided to launch a VC fund with a specific investment focus.
GPs are typically high net worth individuals, former entrepreneurs, company operators. They can also be financiers, celebrities, or athletes or any other individual or group that believe they have a particular industry expertise or focus, a desire or passion to build companies or a track record of investing and developing startups.
These GPs typically but not always, develop an investment thesis for their VC fund, which will outline the potential opportunity for those looking to invest in the fund.
Firstly, the type of companies to be targeted for investment. This could be by industry sector and stage, or it could be driven by businesses with a specific type of product or services such as B2B companies, SaaS software, AI tech, or FinTech, which could all be considered opportunistic or growth sectors. The investment thesis will explain the fund's point of view on the selected product market or industry sector. It'll also explain the unique value proposition to entrepreneurs. This is essentially to explain how they will contribute to a company's growth. The investment thesis will also disclose the hopefully impressive experience or credentials in managing a fund.
It'll also state the targeted amount of capital raise and allotment per startup. It'll disclose the management fee and carry, which we discuss later, the capital call terms and timing if applicable, and the targeted returns for the VC fund.
Although a GP may have multiple VC funds, each VC fund would operate as a separate limited partnership. From a legal perspective, it could have the same or different LPs in each fund.
The fundraising period for GPS of a new VC fund can take up to two years to complete. The general partners will often spend months seeking out potential LPs to pitch their VC fund opportunity and ask the LPs to commit a pool of capital. VC funds target various sources for their LPs. Typically, a VC fund will Have one or more of these LPs closed before they begin to seek out investments. They may decide to keep the fundraising process open and in parallel with their investing stage so long as a minimum target of LPs have closed. The rationale may be that the VC fund does not wanna miss out on a potential investment opportunity, or the VC fund is confident that it has a sufficient number of LPs circled, or the potential PR with an announced launch of a VC fund will further support their fundraising process.
So where do VC funds turn to for sources of capital for their investment activities? From small to large check sizes these can include, high net worth individuals who are seeking to invest in capital funds as part of their investment strategy. Family offices managing multi-generational wealth through a collective investment strategy. Foundations that invest in funds aligned with their goals. For example, the Gates Foundation and the Rockefeller Foundation. University endowments have long been substantial investors in VC funds. For example, Harvard, Yale, and Stanford Universities. Fund of funds investment vehicles that raise capital from a pool of investors and invest in other funds rather than in direct investments. This is a large and significant asset class investing in VC funds.
And institutional investors, which include pension funds, financial institutions, and sovereign wealth funds. For example, the government pension fund of Norway was set up to shield the Norwegian economy from negative impacts on oil prices and to diversify away from the oil or petroleum sector. This sovereign fund has investments in over 70 countries, made directly through VC funds.
For first time VC funds or for small amounts. The GPs will often take the lead and run the fundraising process themselves for larger VC funds or for subsequent capital raisers of successful VC funds and investor relations team is hired internally or is outsourced and is responsible for managing and executing the fundraising process.
After the VC fund secures the capital commitments, signs the documents, and announces the launch of a VC fund, it then begins to seek out investment opportunities that are aligned with their VC fund's investment thesis. This is the next period referred to as the investment period, which typically extends for a period of three to five years. Most VC funds provide for a 10 year fund term or fund life with up to two one year extensions at the of the GPs.
