At a very high level, venture capital funds are pooled investment vehicles. Venture capital fund investing allows the fund manager to manage the money of third-party investors who seek to own private equity stakes in businesses with superior growth potential. These types of investments are characterized as high-risk/high-return investment opportunities.
Venture capital firms such as 1839 Ventures® not only speak with but develop and maintain continued relationships with investors to raise pooled investment vehicles called funds. The fund is raised for the venture fund to then manage the investment of capital into qualified high-potential companies. The primary goal of most venture capital funds is to achieve long-term capital appreciation through a buy-and-hold strategy.
Difference Between a Capital Commitment and a Capital Call
As it relates to venture capital funds, a capital commitment is a decision made by an investor to invest a certain amount of their long-term assets in a venture fund over a specified period. A venture fund that seeks capital commitments may set certain restrictions surrounding any minimums or maximums that are acceptable to the fund. These restrictions – if any – are further outlined within a fund’s term sheet. A capital commitment is finalized and bound by the operating agreement.
A capital call is fundamentally a legal right of an investment firm to demand a portion of the money promised to it by an investor. Venture funds usually make a series of capital calls from their investors. As is the case with many fund investments, where a startup business does not receive the entire investment all at once, and neither does a venture fund receive all of the committed capital.
There is often a capital call made upon the initial closing. Within the operating agreement, a period is set from the original close to allow for what is known as a final closing. This final closing allows for any investors that may have been in discussion with the firm to finalize their investments. After the final close, the fund cannot accept any additional investments.
Who Invests in Venture Capital Funds?
Venture capital funds receive a majority of their investment from third-party investors. These investors can be high-net-worth individuals, family offices, or other institutional investors. In general, the fund managers of the venture funds will also have invested some of their capital for them to have a bit of skin in the game. This personal investment acts as a strong motivator for fund performance.
How do Venture Capital Investors Obtain ROI?
Venture capital fund investors receive a return on investment (or ROI) when there is what is called a qualified exit event. As with any other investor, an exit for a venture capital fund is how a fund closes out a specific position, usually converting that position to cash. In the case of individual investors, those investors may either choose to reinvest a portion in a new venture capital fund, receive cash, or reinvest in another asset class.
For venture capital funds like the ones managed by 1839 Ventures®, there are several pathways to an exit for a portfolio company. An exit may include IPOs, or an initial public offering, whereby the stock of the portfolio company is made available to the public via stock markets. They may also include management buyouts, where the management buys all the stock. The most common scenario for a portfolio company is the merger or acquisition by another company.
Getting Started as a Fund Investor
One might ask, how to start investing with a venture capital firm like 1839 Ventures® or one of the 1839 Venture Funds™. First, investors should realize that all venture firms are not created equal, nor are venture capital funds appropriate for every type of investor.
1839 Ventures® is an Exempt Reporting Adviser, meaning that we are registered with the State Securities Board of the State of Texas. Our firm and staff’s information can be looked up through FINRA and BrokerCheck. Whether or not you invest in our firm or any other investment adviser, it is recommended to use BrokerCheck. You should also note that anytime any investment advisory company uses the term registered, the SEC requires them to mention that by using the term registration, it does not mean the SEC endorses them as a firm, nor does not imply a certain level of skill.
Steps to Investing
1839 Ventures® requires each of our investors to qualify as an accredited investor. An accredited investor is defined by the SEC in Regulation D Rule 501. The general public and potential investors can download our firm’s Form ADV, Code of Ethics, and Privacy Policy. Any changes to these documents are available promptly.
Once these documents are delivered and reviewed, an investor must be qualified to invest in one of the 1839 Venture Funds. Along with this qualification, the suitability of investing must be determined. Once the investor is qualified as an accredited investor and the investment is determined to be suitable, an Offering Agreement will be delivered. When the investor chooses to move forward with a capital commitment, the Subscription Agreement finalizes the agreement. An initial capital call will be outlined in the fund’s term sheet.
