Starting and running a successful venture capital firm is not child’s play. There is so much you need to know that some people just stay completely away from it. This is a guide on how to start a venture capital firm in South Africa.
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Venture capital firms invest in businesses in order to get returns, these are usually start-up companies with a lot of potential for growth. VCs can invest in public companies as well, if they believe that the company will grow significantly in value over the coming years.
The barriers to entry are sky high, unless you have your own millions that are lying around. Just like forming any business, venture capitalists also need funding, which they usually get from limited partners (LPs). LPs are the guys who fund venture capitalists who in turn fund startups.
VCs make returns on investment and take a 20 – 30% cut and send the rest to the LPs. If you have enough money to invest yourself without LPs then you should probably be an angel investor. This guide assumes that you know nothing about how VCs work.
Venture Capital firms usually reserve 2% of the fund for expenses, including salaries. If for example; the fund has R10 million then 2% of that will go towards managing the fund.
The expected returns are a bit high; LPs expect you to triple their money, this means if they give you R10million then you should turn it into R30million, within a decade. That’s very hard and will need you to be in a position to invest in the most promising of startups.
The first thing you need to do is to get some experience, the best way to get some experience is by working at some fund first. This will teach you the ins and outs of the industry, it will also help you to build a personal brand.
Most LPs will not give their money to someone who doesn’t have an impressive track record. You have to prove that you are really good at picking good companies to finance, it can’t be one or three, it has to be at least 7 companies.
Alternatively, you can gain experience by being an angel investor. Being an angel investor means taking your own money and investing it into startups. Angels usually fund the seed round of funding, when the company is getting right of the ground. This is much harder because you are basically funding an idea which is not yet a business.
Successfully investing in the right startups will help you to build a solid track record, which will make it much easier to convince LPs to give you their money.
Build a brand
You have to build a brand around yourself, you should be someone that startups would like to work with. This is because the more successful a startup becomes; it gets to choose on who becomes an investor. You as a VC will compete with hundreds of other VCs, there has to be something that sets you apart.
That’s why some people prefer to operate under a franchise, branding is everything in this field. Especially if you want to get the best deals.
You need lawyers for almost everything, these should be lawyers who have an extensive experience in drawing up fund contracts. They will make sure that you close down any loopholes that can drag you into needless legal disputes.
There is a lot more that goes into starting a venture capital firm, this was an overview of what you should do. Do you have any thoughts or questions? Comment below.