appropriate investment opportunities with the right management teams and in growing and scalable markets.A fund's general partner is a significant factor of any successful venture fund. Just as with portfolio companies, a fund is only as good as the people running it.
Finally, deal flow is essential for a successful venture fund. Capital contnbutions are meaningless without investments with which the venture firm can put them to use. Especially for first-time funds, it is important to establish deal flow well ahead of time: Since many investments take three to eight years to liquidate, a fund will try to invest almost all of its capital within the first three to five years to make sure that most or all portfolio companies have reached an exit by year ten (when venture funds usually get liquidated). Unless adequate deal flow exists, the investment process (and thus the fund's lifespan) may be lengthened, resulting in diminished internal rates of return to the limited partners.
Returns and Risk
Most venture capital funds desire returns of ten times their onginal investment within three to six years, though some will still invest in opportunities that generate five times their investment or more. This goal is passed along from the limited partners, who expect an annual return of approximately 20 percent. As most of the venture industry consistently delivers an average return of 19 to 22 percent per year, most venture capitalists will aim high and attempt to accomplish annual returns of approximately 35 percent from a given investment to satisfy this industry standard.
To the surprise of many entrepreneurs, in order to accomplish this, venture capitalists will often adjust a company's valuation. When evaluating an investment opportunity, the first step is to examine the proposed value and make certain it's in a range with which the firm is comfortable. After that, venture capitalists estimate their probable returns in a preferred stock transaction, add to that the probability of further funding rounds and anticipated dilution, and establish best and worst case scenarios. Then, by running expected deal terms through a variety of spreadsheets and financial models, the venture capitalists determine the investment's returns under various estimated exit scenarios. If such returns don't satisfy the limited