Business Lawyers in Columbus, Ohio
By Drew Stevens - March 18, 2020 - Startups + VC
At a conceptual level, venture capital is straightforward
enough – money is raised, money is invested, and money is paid out to the general
partner and limited partners. Digging deeper though, starting and structuring a
venture capital fund can be incredibly complex and time consuming. Here, our
Columbus venture capital lawyer provides an overview of the key components of a
venture capital fund.
1. What type of fund
are you starting?
Determining what the overall fund goals and target
investments are can be a crucial first step in starting your fund. Key factors
to consider include target startup stage, target sector(s), traditional vs
evergreen structure, and target geography.
Target startup stage entails deciding if your fund will
focus on investing in companies in a particular stage, such as seed, early, or
late stage companies. Seed and early stage investments can be on the riskier
side but can offer a higher return. Late stage companies have been operating
for longer and may offer more stability, but the returns may not be as high as
compared to seed and early stage companies.
Further, focusing on early vs late stage companies can
determine the number of companies your fund will invest in and the check sizes
with those investments. With seed and early stage companies, typically the
valuations are lower, and you’ll subsequently be able to write more checks and
build a larger portfolio of investments. In contrast, late stage companies may
be raising for their Series B or Series C rounds and investing in such companies
may require significantly larger check sizes.
Another key consideration is whether to structure the fund
as a traditional or evergreen fund. The predominant model is the traditional
10-year fund (also called closed-end funds). Though there are no hard definitions
for the 10-year timeline, the 10-year fund roughly spends the first third of
the fund’s existence making investments, the middle third managing the
investments and making follow-on investments, and last third of the fund cycle
harvesting the investments and distributing proceeds to the limited partners
and the general partner.
The alternative fund structure is the evergreen fund (also
called the open-ended fund). True to the name, the evergreen fund features no
hard timeline or termination date. This can offer fund managers more
flexibility in having a longer timetable to prospect for and make investments.
Evergreen funds can also be very attractive to startups in that the evergreen
fund can remove the pressure to grow and sell within the usual five to eight
year period with the traditional model.
Final structuring considerations include whether to focus on
a particular geographic area and/or specific sectors. A geographic focus can be
a particular state (focusing only on companies in Ohio, for example) or a
particular region (the Midwest). Sector focuses can be broad (technology or
software) or narrow (artificial intelligence or eCommerce).
2. Overall structure
of the venture capital fund
A full venture capital fund consists of multiple entities.
At a high level, the fund itself is typically a limited partnership formed in
Delaware. The members of the limited partnership consist of the general partner
and the limited partners.
The general partner manages and runs the limited partner
fund. This includes searching for and making investments, raising money from
investors, and advising and assisting the fund’s portfolio companies. At times,
the general partner may also choose to have a manger handle certain aspects of
The limited partners invest into and fund the limited
partnership. Limited partners typically invest through an LLC or a corporation.
Finally, the limited partnership fund may itself fund
subsidiary LLCs. These LLCs may exist to directly invest in the target startup.
Starting a Venture
Fund Part II
In Part II of this series, we’ll dive into more detail
regarding the mechanics of the general partner and the fund limited
Columbus, Ohio Venture
Capital Law Firm
If you’re considering starting a venture capital fund in
Ohio and have questions or concerns with structuring your fund, contact our
Columbus venture capital lawyer today.