Investing in venture capital
What is a typical venture capital investment?
VC seeks returns by providing early-stage financing to privately held companies thought to have strong growth prospects due to a new technology, product, or business model.
HERE ARE SOME OF THE COMPONENTS:
The General Partner (GP)
GPs set up the funds and are its day-to-day managers. Primarily, they choose companies that the fund invests in, and manages these transactions. On top of allocating capital, the best GPs provide value to founders in the form of advice, introductions, and services.
The Limited Partners (LPs)
LPs are the fund’s financial backers, the people whose capital is being invested. LPs are usually wealthy individuals, family offices, and financial institutions.
The two most common investment vehicles are:
Special Purpose Vehicle Funds
Allows investors to actively choose the companies they want to invest in.
Traditional VC Funds
Invests in multiple companies over a set number of years.
These private companies typically have high growth potential, with the goal to become a significant player in their industry. Companies seek VC funding at various stages in their growth. They may need capital to accelerate the development of their product, finance their growth as they scale, capture a significant market share – and everywhere in between.
What is the timing of venture capital investments?
Venture Capital is generally a long-term investment, typically over the course of several years
While private companies can be slow to get to a liquidation event, it can also mitigate the volatility found in assets with higher liquidity, like publicly traded stocks and bonds.
The holding period or time horizon for venture capital is generally several years (the average is 7 years). The timeline to liquidity will also depend on whether the investment is made at an early-stage or at a later-stage.
Just like a fine wine, investors should expect their VC investment to slowly age over time before achieving its full potential.
How much do investors invest in venture capital?
On average, investors allocate 2% to 5% of their total assets to alternative asset classes such as venture capital.
When deciding how much to invest, investors should strongly consider diversifying their risk by investing in multiple companies (by making multiple individual VC investments, or investing in a diversified VC fund), as well as plan to reserve some capital for a follow-on strategy.
Investment minimums can be high to enter into VC funds, although Brightspark has some of the lowest investment minimums in Canada: $10K for individual deals, and $100K commitment for a diversified fund.