Venture capital
Factual definition
Venture capital is investment capital for businesses with high growth potential, commonly young companies but also later-stage ventures. Returns can be concentrated in a small number of successful investments.
Show how one winner can drive the portfolio multiple
Hypothetical: a venture fund invests US$2 million in each of ten startups, or US$20 million in total. One investment produces US$50 million of cash proceeds to the fund, and the other nine are assumed to return zero.
That is 2.5× gross invested capital before fees, carried interest and expenses. The US$50 million is fund proceeds, not the company’s valuation; 2.5× is a multiple, not an annual return.
Trace the winner’s proceeds through the ownership
Separate hypothetical winner. A fund invests US$2m for 20% of a startup.
Later financings dilute it to 10%, with no further investment by the fund. At exit, assume US$500m is available for all common shareholders after debt, senior claims and transaction costs, and all remaining shares participate proportionally.
The fund receives US$50m.
If its final stake were 5% instead, the same equity pool would produce US$25m. With the other nine US$2m investments returning zero as in the earlier portfolio example, the portfolio multiple would fall from 2.5× to 1.25× before fund fees and carry.
The company can be a large success while the fund’s outcome changes substantially with ownership and financing terms.
The SEC’s early-stage financing overview describes equity and convertible funding. Before extrapolating a winner across a venture portfolio, check retained ownership, preferences, follow-on capital and exit timing.
A company’s headline valuation does not reveal the cash attributable to a particular fund.
Where Venture capital fits
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