understanding how that relates to the fund, the structure of the general partnership, the structure of the limited partner (corporate, institutional, foundation, high net worth, family office, etc.) makes the whole thing even more complicated. An entrepreneur would truly have to understand how a venture firm works from the inside and how limited partners affect the business dealings of the venture capitalist. This may seem too much to bare for someone just interested in raising money, but I find that the truly capable entrepreneurs out there understand these issues. Someone should write a book on exactly how limited partners work with the venture funds and clearly portray case studies and how they affect venture transactions.
Elements of a Successful Venture Fund
Naturally, any fund must accomplish its projected annual returns, or it becomes nothing more than a chanty project for limited partners. To truly help a fund excel, however, venture capitalists must look beyond investment returns. There are several qualities necessary for a fund to succeed: active investment, a diverse portfolio, the right management, and deal flow. All are essential parts of a fund, each in its own distinct way.
Many funds only make passive investments rather than helping their companies grow or contributing to its value. Such a strategy may prove very successful but is unfulfilling and leaves a great deal to chance. In order to be proactive about success, I believe funds must make value-add investments that help move their portfolio companies toward their goals.
Maintaining a diversified portfolio gives a fund both security and mobility: A single company's failure will not mean the ruin of the fund, while the investors have the freedom to pursue multiple opportunities. Even if a fund clearly identifies industry sectors, it should at least focus on multiple verticals in order to stay flexible in different market environments. Most funds hold their portfolio investments over three to eight years, dunng which time markets can shift dramatically.
A fund must also have an experienced and entrepreneurial team who knows what it takes to build and exit companies. Venture capitalists must not only understand how businesses work at multiple levels, but they must also possess fundamental transaction, market, and human knowledge to select