When a startup announces a fundraising, the attention is almost exclusively on the amount raised. However, behind each check hide financial mechanisms which condition the way in which the investor will support the company. For a founder, understanding these incentives is as crucial as the capital received.
The economic model of a venture capital fund is based on two pillars, namely annual management fees, generally 2 % of the size of the fund, and the Carried Interest, 20 % of the capital gains generated. In large funds, costs become a major source of income, encouraging the accumulation of assets more than in the search for exceptional performance. The smaller funds only survive if they deliver high multiple. These differences create divergent behavior in the face of funded startups.
- How does a venture capital fund earn money?
- What your investors really earn, or understand the remuneration mechanics of management companies
- Understand the rules of the investor game to better raise funds
The value creation mechanics is based on two essential variables, the share held in a company (Ownership) and the ability to identify a small number of companies that will achieve most of the yields (outliers). For a founder, this implies that an exit at 100 million euros, potentially transformer on a personal basis, can be considered marginal by its investor, whose portfolio requires unicorn to survive. This is the origin of pressures often exerted to target rapid growth and ambitious valuations.
To these logics are added the management strategies internal to the funds, thus the reserve policy determines whether or not a VC will follow the following rounds in order to preserve its share. Recycling, which consists in reinvesting liquidity from the first outings, increases the capital actually deployed beyond 100 % of the fund. Finally, the limited lifespan of an investment vehicle (between seven and ten years) requires a calendar of outings which can diverge from the ambitions of the founders.
The size of the funds accentuates this fracture, thus the megails, close to the Private Equity in their logic, target secure but weaker yields, often centered on massive and very publicized deals. Emerging or small funds are looking for performance in Early Stage by focusing on non -consensual files, and engaging an alignment often stronger with the founders. The choice of an investor is therefore not reduced to the proposed valuation but rather to the fund’s strategy.
An entrepreneur will benefit from asking simple but structuring questions, go tomorrow to discover the list of key questions to ask in your next round or exchange with an investor. Do not hesitate to subscribe to our newsletter to follow our contents We Love entrepreneurs on Frenchweb.fr
