Let’s assume you have a GREAT scalable Online business idea, monetization model and a team – but you need money for your business. One money source would be venture capital, but what kind of money is that? Venture capitalists themselves are not necessarily multi-millionaires, yet, but rather they are smart people investing other people’s money. Often that money comes from pension funds or large companies – so called limited partners.
How the venture capital does its magic…
- => first the pension funds invest into a …
- ==> a venture capital firm’s fund…
- ===> which then invests into startup companies with a high growth potential
- <=== then the successful startup companies get sold…
- <== each startup entrepreneur and the venture capital fund divide profits of company sales
- <= venture capital fond returns money to the pension funds
- => and if the venture capital fund made any real profits, even the venture capitalists will get their share of the profits
Venture capitalists typically finance their operations by charging a ~ 2% management fee of the committed capital. And as a performance bonus VC firms also receive a “carried interest” – payment, which is about 20% of those profits that the venture capital fond earns during its ~10 years of active operations time.
So, if all parties play the game right there can be genuine win – win – win exits