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If you are looking for funding or investment for your startup business, you may come across venture capital funds. A venture capital investor can be a good way of financing your business in its early stages. This can be an excellent way to grow your business rapidly, increase your market capitalisation, and develop your product or service. Understanding a venture capital limited partnership can help you navigate your obligations and finance structure. This article will explain some key points that you should consider when dealing with venture capitalists.
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What is Venture Capital?
In short, venture capital provides capital to startup companies that are anticipated to have long-term growth. In other words, the goal of a venture capitalist is to find a young company with high future growth potential. Venture capital can be provided for by private investors, investment banks, and other investing institutions.
Venture capital is usually a good option for young businesses, especially if they have limited access to traditional debt instruments. For instance, it may be difficult for startups to access capital markets and bank loans. Furthermore, having large amounts of funding can be essential for your business to carry out its strategy.
What is a Partnership Structure?
Most venture capital funds (and, more generally, most private equity funds) are structured with limited partnerships.
A fund will consist of general partners as well as limited partners. The general partners will be responsible for running and managing the partnership. In addition, they are liable for all of the debt and obligations of the fund. As a result, the general partners are usually organised as a company, such as venture capital or a private equity company.
Limited partners are any partners who are not general partners. They will contribute to the capital pooled using their own money but will not participate in the fund’s management. Typically, a limited partner will be an institutional investor, such as:
- a pension fund;
- a sovereign wealth fund;
- a university endowment; or
- a high net-worth individual.
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What Does This Mean for My Company?
You must understand how your funding is structured. Because the general partners will be the ones managing the fund, they will be the ones who might want to get involved in your business.
A venture capitalist will want some equity or stake in your company as part of their overall investment. This is because venture capitalists seek to profit by helping a company with growth potential to reach its potential.
They will typically do this by injecting funding and helping your company’s strategy and growth. Indeed, not all venture capitalists solely offer funding. Some will have expertise that exceeds their investment money’s value.
At the same time, you must establish your firm’s strategy with any fund managers from the outset. In this way, you will reduce the risk of any potential big falling out between yourself and your venture capital partners.
Key Takeaways
If you are a small business or a startup company with high potential growth, you may look at securing an investment from a venture capitalist. However, you should also remember that venture capital funding usually comes at the expense of equity in your company. The venture capital fund will typically take an equity stake in your company for the money they provide you. This can mean that you lose control over your company’s decision-making process, and it can cause complications if your strategy is different from the venture capitalists.
When you are dealing with venture capitalists, you will usually be dealing with the general partners. General partners are essentially fund managers, while limited partners are typically institutional investors who put forward their money and have little or no managerial obligations. Keeping this in mind is important in managing your relationship with your venture capital partner in the future.
If you need help understanding a venture capital limited partnership, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A general partner is a manager of the fund. They take on liability for all of the debts and have more power to control what happens with the fund.
A limited partner is someone who pools together their capital as part of the overall fund.
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