What is a Venture Capital Fund?

A venture capital (VC) fund is the sum total of money investors commit to invest in startups that show promising growth potential. The investor who puts in the money is known as a limited partner, whereas the people who manage the fund are known as general partners (GPs).

 The GPs determine which start-ups the fund must be deployed for based on the benchmarks laid out by the funding partners, such as:

·       The market position of the business and how its products or services make it stand out from the crowd

·       Growth and liquidity potential

·       The performance of the start-up’s management team

 Generally speaking, VCs partner with early-stage start-ups for a decade. The first five years comprise an active investment period and the next five years become a “support period.” If the limited partners agree, this period can be extended for more than two years based on the company’s performance.

 Once the VC fund’s life comes to an end, the profits are distributed among the limited partners. The GP typically gets a fee alongside a share in the net profits.

 What is a Venture Capital Firm?

You can see a VC firm as an investment firm that deploys capital in industry-transforming startups that show signs of substantial growth down the line. These firms offer funding to platforms that do not:

·       Have the cash flow to take on substantial debts

·       Have access to stock markets

·       Have the networking or mentoring services to secure talent and grow at a faster pace

 Through this partnership, businesses get the financial backing to bootstrap their operations and investors gain long-term profits by investing in promising companies.

 From Slack to Facebook and every wildly successful startup in between became industry giants through funding in the form of venture capital. In a nutshell, a VC firm becomes a company’s financial foundation and takes it to new heights.

 How Do Venture Capital Funds Help Dispensaries?

Most of us often picture venture capital funds as a source that shells out capital in exchange for equity. This is only partly true. While VCs look for a high ROI, this result is difficult to attain without mentoring, networking capacities, marketing, and of course, experience. Here are some ways – aside from capital – a VC firm helps startup founders once the deal is closed:

·       Industry Expertise. Your VC team will unlock a wealth of knowledge and resources to ensure you become a leader in your industry.

·       Mentoring. Every startup founder is in a vulnerable position in the initial stages of their startup. While a VC won’t teach you how to run your business, a VC will share valuable strategies to scale, constructive feedback, support and insights, and tips on worthwhile decision-making.

·       Valuable Lessons. VCs are entrepreneurs who have invested in dozens of companies. They help founders avoid mistakes they’ve made in the past and offer a third-person perspective of which decisions may work and which ones may not.

·       Visibility. If a VC backs your startup, you’ve already established credibility in the market. Furthermore, the fact that your VC-backed dispensary has already raised a substantial amount of money will help keep it sustainable enough to become consistently visible. At Dispensary-Growth Capital, we also arm startups with robust digital marketing solutions to ensure they scale faster and more efficiently than ever.

·       Financial Modeling. If a founder has questions about building a financial model, a VC can come to their rescue. If a startup is too small to hire a PR specialist, a VC’s PR experts can step in to help. An entrepreneur-friendly VC firm will always share its resources to ensure early-stage startups grow without obstacles.

·       Contacts and networks. A VC investor unlocks your way to strategic partnerships. They even introduce founders to more investors who may be willing to invest in their business’s growth and expansion. 

How Do Venture Capital Funds Make Money?

Venture capital funds make money in two ways: “management fees” for handling the firm’s capital and “carried interest” (also referred to as the “carry”) on the fund’s ROI.

 Management Fees

This fee is drawn from a certain percentage of the fund’s value every year. After the capital is raised, a VC firm generally charges a 2% management fee to investors.

 Let’s say your venture capital raised a total of $100 million in a VC fund. A fee of $2 million (2% of $100 million) will help cover the cost of paying employees, taxes, partners and associates, accounting, and more.

 Today, VC firms usually start a fund every 2-3 years and the fund lives for a period of 7-10 years. The management fee may be decreased each year until the fund’s lifecycle is complete. Taking the example of the $100 million VC investment, the fee for the first three years may be $2 million. During the fourth year, the fee may drop to 1.8%. These charges may drop to as much as 20 basis points each year – from 1.6% in the fifth year, 1.4% in the sixth year, and so on. Generally speaking, the fee doesn’t go below 1% until the fund’s completion date.

 Carry or Carry Interest

Carry or carry interest is the sum of ownership a VC firm gets as a part of the deal. Most carry interests amount to 20%. 

Let’s go back to our previous example to crunch some numbers: once a fund approaches its termination date, the gains are either distributed to the investors or the startup stages an IPO.

Let’s say the total upside sums up to $200 million. The general partner’s carry interest – after returning the original $100 million to investors – would be $ 20 million, 20% of the total profit ($100 million). The limited partners, on the other hand, would acquire a carry of $80 million or 80% of the $100 million. 

How Is a Venture Capital Fund Structured?

The contributors of a venture capital fund are high-net-worth individuals, investment banks, insurance companies, retirement funds, and other financial institutions. But how are venture capital funds structured? While all investors have partial ownership of the fund, it is the VC firm that decides how the total sum would be invested. The VC firm here is typically referred to as the general partner, whereas the investors are known as limited partners. 

 How Do VCs Raise Capital?

How do venture capital funds make money?

 VC firms raise money from several sources including institutional investors, high-net-worth individuals, and other venture capitalists.

 The process involves pitching their investment opportunities to limited partners. High-net-worth individuals are always on the look-out for high-risk, high-reward investments, whereas institutional investors look for something that is a little less risky. Other venture capitalists are other companies that invest in startups. These companies look forward to investing in startups that come from similar areas as the ones they’ve already invested in.

 How Do VCs Deploy Capital?

The way VCs deploy capital depends on several factors. Some of them include:

·       The total amount available in their fund

·       The type of industry a growing startup operates in

·       The growth stage a venture capital generally invests in (this could be pre-seed, seed, series A, etc.)

·       The current economic climate

 How Do Venture Capital Funds Earn and Share Profits?

In exchange for 1-2 years of financing a growing startup, VCs expect a 10-times return on investment over the next decade. When the life of a successful venture capital fund comes to an end, the portfolio highlights a substantial appreciation. The investors (or the limited partners) get 80% of the gains and the venture capitalist firm (or the general partner) gets 20%.

 What is Different About Dispensary-Growth Capital?

The purpose of taking the assistance of a VC firm goes beyond just the dollars in investment. Aside from supplying your dispensary with ample financial backing, the right VC firm will pave a smooth path toward your business’s growth.

 What sets Dispensary-Growth Capital from the rest of the investors is our dual expertise in securing capital and providing result-oriented SEO services. We tap into our decades’ worth of digital marketing knowledge to help your cannabis dispensary transform into a dominant market leader. 

The cannabis sector comes with stringent regulations, changing customer behavior, and an ultra-competitive landscape. We understand all the laws and rules surrounding the cannabis sector and craft tailor-made digital marketing strategies to propel your dispensary toward endless growth. Ready to know how to secure venture capital funding? Apply now.