Do you want to start a venture capital firm? If YES, here is a complete guide to starting a venture capital firm with NO money and no experience plus a sample venture capital firm business plan template.
A venture capital firm is simply defined as an enterprise whose goal is to get profits for its shareholders (investors) and its management (investment team). They do this by investing capital and expertise in businesses whose value has the potential to grow significantly over a period of time.
This unique business is all about strategy development, raising funds, marketing, buying and selling businesses, general administration, and the million and one details that go into managing a business daily.
However, this business is still a business that is all about the everyday commitment of the team to make things happen and achieve its goal any way legal. If you are looking to begin your own venture capital firm, you should know that the venture capital business provides services to aid clients create personal financial plans.
In order to create these plans, you will have to work with your clients to invest their money in stocks, bonds, mutual funds, life insurance and other assets to help them meet their financial goals at a specific time. Need all the information that will help you come out with a bang in your venture capital firm? Please read on.
Steps to Starting a Venture Capital Firm
1. Understand the Industry
It is important to note that the industry is made up businesses and individuals acting as principals in the buying or selling of financial contracts. Principals are investors who buy or sell for their own account, rather than on behalf of clients.
Analysis has it that in the wake of recessionary declines, this industry has continued on a path to growth, but not without a few ups and downs.
Big fishes in this industry gained from rising security prices and increasing merger and acquisition activity over the five years to 2016. This is why the industry revenue is believed to grow over the five-year period at an annualized rate of 9.1% to $42.9 billion.
Experts in the industry have also noted that revenue growth was hindered in the early part of the period as the industry was reluctant to bounce back from the financial crisis and subsequent recession of the prior period that made stock markets and business activities to dramatically contract.
The moderate capital intensity in the industry is due to the medium level of capital assets, primarily IT systems, needed to function in this industry. It has been stated with facts that the major form of costs associated with this industry is wages, management and other professional fees.
Generally, wages account for 19.3% of industry revenue. Conversely, depreciation only accounts for about 2.6% of industry revenue.
It is crucial that you know that there is a high level of administrative work involved in the industry, such as the processing of investment activities that need more labour input than capital input. Literally, for every dollar spent on labour in the industry, only about $0.14 is allocated toward capital equipment.
2. Conduct Market Research and Feasibility Studies
- Demographics and Psychographics
We all must have known that a venture capital firm is easily identified as businesses and individuals acting as principals in the buying or selling of financial contracts. A venture capital firm will establish a fund and use it to invest in multiple businesses with the goal of making substantial profits with time.
Venture Capital firms are known to often target upcoming or under-performing businesses and after investing in the company, use their management expertise to improve profitability. It is important to note that venture capital firms are always searching for companies that have a concrete business plan and are well-positioned to benefit from attractive industry trends.
An important aspect of this investment process is the extensive research performed on the supposed company. According to industry experts, this is more like an investigation process for a potential investment: firms with such expertise are contracted to perform this research in order to make sure that they are making a sound investment.
For the success of the investment, this stage is very important and the venture capital firm must look at all critical aspects of the target company: commercial, financial and legal.
3. Decide Which Niche to Concentrate On
Venture capital firms routinely invest in a wide mix of private and public investments but depending on the firm’s size, stated investment strategy, and industry and transaction expertise. But focusing on a particular niche can create focus and foresight for your business. The niches can include;
- Venture capital investment in healthcare
- Venture capital investment in agriculture
- Venture capital investment in shipping
- Venture capital investment in airlines
- Venture capital investment in science and technology
- Venture capital investment in education
- Venture capital investment in insurance
- Venture capital investment in biomass
- Venture capital investment in sports and movies
The Level of Competition in the Industry
It is important to note that the US and China are the largest venture market in the world, followed by Europe. Estimate has it that Venture capital investments in China grew from about $17 billion in 2014 to about $49 billion in 2015 alone. india and Israel are other growing markets for venture capital investments.
Analysis also has it that the US venture capital industry includes about 800 firms that had about $165 billion under management in 2015. Business and industry operations in the US venture capital industry rose for the sixth consecutive year in 2015, following the low reached in 2009. But this activity level was still far below those seen before the financial crisis that hit the world.
In the global venture capital industry, business and demand are moved primarily by the speed of technological innovation and the number of businesses that start to commercialize new technologies. Also it has been noted that the profitability of individual businesses rests on successfully picking and managing a portfolio of investments to yield profits.
Big fishes or firms in the industry have advantages in attracting capital, developing expertise in multiple technology markets, and funding large deals. But it has been noted that small businesses can compete effectively by concentrating on specific market sectors.
4. Know Your Major Competitors in the Industry
- Correlation Ventures
- Flight Ventures
- AngelList’s Syndicates + Maiden Lane
- Signal fire
- Tusk Ventures
- Deep Knowledge Ventures
- Redstone digitals
- Kima Ventures
- 500 startups
- Y Combinator
- Entrepreneur First
- Lighter capital
- Bullpen Capital
- Data Collective
- Upside partnership
All the sector in the general financial industry pool together funds from different investors. They all differ in investment styles and objectives, asset types, use of leverage and regulatory requirements. Also they are ranked by estimated assets under management (AUM) as a percentage of the whole alternative asset market.
The venture capital business sector has expanded over the past five years to represent an estimate of 49.6% for the total industry AUM.
It is also expected to account for an even greater share of the total industry revenue, this is because they require higher fees than those charged by hedge funds and declining popularity of other alternative asset vehicles in the aftermath of the subprime mortgage crisis.
5. Decide Whether to Buy a Franchise or Start from Scratch
It is no longer a new fact that the Venture Capital industry has reached near universal agreement on the benefit of constructing a strong brand, as a sure way to create external awareness and internal cohesion.
In the business world and also to be very successful, venture Capital houses today pour in resources to improve, strengthen and understand the perception of their brand in the market and make changes to their brand in respect to industry trends.
It is also important to say that brand awareness is the major advantage of buying a franchise and that is a big plus in building a successful venture Capital firm business.
A franchisor can also offer you training, access to advertising support, signage and shop fittings, equipment and access to operational intellectual property, materials, supplies and stock, and ongoing advice, which can be hard to get when starting from the scratch.
6. Know the Possible Threats and Challenges You Will Face
Our world today has seen the rise and fall of many venture capital firms, but most firms are small to mid-sized shops that can range from just two employees to several hundred workers. You should know that starting a venture Capital firm business is not an easy job, the challenges you may face include;
- Defining your business strategy
- Setting Up the Business Plan and the Operations
- Establishing the investment vehicle
- Determining a Fee Structure
- Raising funds
7. Choose the Most Suitable Legal Entity (LLC, C Corp, S Corp)
Our extensive research about the industry in the united states has shown that venture Capital firms typically assume the structure of a limited partnership or a limited liability firm.
Being the founder of the firm, you will be a general partner, meaning that you will have the right to decide the investments that compose the fund. While your investors will be limited partners who don’t have the right to decide which companies are part of your firm.
You should know that Limited partners are only accountable for losses tied to their individual investment while general partners take care of any additional losses within the fund and liabilities to the larger market.
Without much delay, you will need a lawyer who will aid you draft private placement memorandum and any other operating agreements such as a Limited Partnership Agreement or Articles of Association.
8. Choose a Catchy Business Name
In starting your venture capital business, it would be in your own best interest to have a very catchy name. Why is this vital? This is vital because you can attract your customers with the best of names. Here are samples you can use;
- Didact Capital LLC
- Citadel Partners LP
- Alfred Capital Partners LP
- Capitol Advisors LLC
- Ocean Holdings LP
- Martel Capital Management LLC
- Fund Management LLC
- Merger Ventures Management LLC
- Shannon Funds LP
- Flowsy Associates LLC
- Iron Ventures LLC
- Golden gate Trust LP
- Green bridge securities LP
- Future Advisors LLC
9. Discuss with an Agent to Know the Best Insurance Policies for You
We all know that the current global political and economic events have changed the landscape for venture capitalists and venture capital firms.
Anyone versed in the industry will be able to tell that increased litigation threats arising from portfolio company bankruptcies, dissatisfied investors, regulatory investigations and employment practices suits are now forming new levels of risk for venture Capitalists and venture capital firms, as well as the personal assets of their managers and employees.
This is the very reason why insurance is needed to have your back when the wall of misfortune falls on you and your business.
- Errors and omissions insurance
- Property insurance
- Workers Compensation Insurance
- Business interruption insurance
- Umbrella Policies
- General Liability Insurance
- Payment protection insurance
10. Protect your Intellectual Property With Trademark, Copyrights, Patents
For the sake of this article, we will be as direct as possible. If you are planning to start up your own venture Capital business, then you should reason critically about going for intellectual property protection to be able to protect your intellectual property.
Filing for intellectual property protection for a venture Capital business goes beyond protecting your company’s logo and other documents, but also protecting your investments, patents and of course the name of your company.
Protecting your intellectual properties may seem hard but it’s not. You just need to file for intellectual property protection and also register your trademark. You are expected to begin the process by filing an application with the USPTO. The final approval of your trademark is subject to the review of attorneys as required by USPTO.
11. Get the Necessary Professional Certification
Without doubt there are many options for advancing your career in venture Capital, either through degree programs or certification training programs. The top venture Capital degree and certification programs have something in common:
They offer participants with many resources to adequately understand the industry, and they depend on dedicated staff to serve their clients, and the staff or advisors should have a background in the field. Few certifications in the venture Capital business include;
- Certified venture capital professional (CPEP)
- Certified venture capital specialist (CPES)
- The Chartered Financial Analyst (CFA)
- European Venture Capital and Venture Capital Association (EVCA)
12. Get the Necessary Legal Documents You Need to Operate
Indeed the industry has many documents, both legal and financial, required of a venture Capital business. It is advisable in order to avoid having problems even before starting the business that you get all the required documents, but note that the documents your venture Capital firm need may differ in each state or county.
- Business plan
- Business license
- Limited partnership agreement
- Article of agreement
- Memorandum of understanding
- Business Pitch Deck
- Capitalization table
- Convertible Promissory Note
- Corporate director agreement
- Corporate minutes
13. Raise the Needed Startup Capital
In all sincerity, before you get to this point you must have arranged and gotten all the legal documents you need and a well-structured business plan. It is also important that you have in mind that marketing collateral will be needed prior to the process of raising capital. New managers will also want to make sure that they have gotten a proper severance letter from previous employers.
A severance letter is important because employees require permission to boast about their previous track record in any marketing collateral. Without doubt, they all push you towards one of the greatest challenge of starting a venture capital firm: convincing others to invest in your fund.
You need to first and foremost prepare to invest in your fund. Fund managers who had had success during their careers will likely be expected to provide at least 2% to 3% of their money to the fund’s total capital commitments.
Apart from having a mind blowing investment track record and investment strategy, having an interesting marketing strategy will be central to raising capital and funds for your venture Capital firm.
Because of certain regulations on who can invest and the unregistered nature of venture capital investments, the government says that only institutional investors and accredited investors can provide capital to these funds. Institutional investors include insurance firms, sovereign wealth funds, financial institutions, pension programs and university endowments.
14. Choose a Suitable Location for your Business
The earlier you understand that the location you choose will have a big impact on your business, the better for you. Its size, layout, location and appearance should all boost your operations while respecting zoning and environmental regulations.
It is advisable that you seek the advice of an independent commercial real estate advisor who can aid you set criteria for choosing the right building for your venture Capital firm.
It is your duty to make sure that any advisor you contract knows the area and is familiar with zoning regulations and any potential issues concerning the building, its location or uses to which it may be put. Things to consider when choosing a suitable location for your venture capital business include;
- If it is the right location
- Does it require modification?
- Tax and infrastructure
- Allowing for future growth
- Separate your needs from your wants
15. Hire Employees for your Technical and Manpower Needs
We already know that venture capital is capital invested in non-public companies that offer superior long-term return on investment. In the industry, investors include high-net-worth individuals, pension funds, charitable endowments and sovereign wealth funds.
Thus business is most times structured as limited partnerships, with partners taking an active role in the operation of portfolio companies.
Successful venture capital firms need a combination of technical and people skills. You should have it in mind that your venture capital firm management requires financial skills, such as analyzing financial statements and estimating the value of private companies.
It might be a difficult process because private companies are not mandated to disclose their financial results. Your staff also need to understand contract law, because you and them will be highly needed in structuring potentially complex deals, including doing the necessary due diligence.
When starting this unique business, you need negotiation and networking skills. This is because you need to meet and speak with investment bankers, venture capital investors and other market participants to get leads for possible deals for your firm.
It is pertinent that you establish a certain level of trust with business owners and executives because you will need to work with them before and after closing transactions for your firm.
Also you still need the negotiation skills to convince business owners that your venture capital firm can enhance shareholder value, while preserving organizational values and culture to a great extent.
In the course of your business, you may also have to negotiate with other institutional investors to put together the financing for large deals, also with labour unions to implement cost-saving measures to raise the earnings and cash flows of your portfolio companies.
Also to be successful, you need to empathize with owners who have built their companies their entire lives, and with employees concerned about their livelihood. It is your duty to know when to hold onto an investment and when to cut your losses.
The Service Delivery Process of the Business
For those who have researched the industry, the systematic process for evaluating and completing a new venture capital investment opportunity has many different and structured approaches that can differ widely by Venture capital firms, and can vary greatly due to specifics of the target company or the transaction process.
But we know that the initial investment evaluation can happen very quickly, but the entire process may take several months or even a year or more to be completed.
It’s very important to note that the discovery and assessment of the opportunity at the beginning of the process is called “sourcing”. In this phase, the firm finds potential targets and looks at the viability of the investment and the potential returns available.
Just as more and more information is gathered, the firm conducts due diligence, builds and develops very detailed financial models, and evaluates the pros and cons of the opportunity pending the final approval and execution of the transaction.
Also it is agreeable that the general aspects of the process are the same across various firms, the details can differ greatly based on how the investment opportunity was sourced (proprietary sourced vs. public auction) and each firm’s investment committee process.
You should know that the larger the firm, the more formalized the investment committee process will be and the higher the probability that public auctions will be used during the process. In the same vein, it’s believed that growth equity firms will have to work on more proprietary-sourced deals where they have less competition and are dealing more directly with management.
Also in the industry, immediately a venture capital firm has officially signed a deal with the target company, both parties will jointly issue a press release announcing the transaction. At that junction, both parties will strive toward closing the transaction, which can take from a few months to a year to complete, depending on the size and complexity of the transaction.
16. Write a Marketing Plan Packed with ideas & Strategies
We all know that marketing in business has been around since the exchange of goods and services began, but today digital marketing is an essential key to success. We also know that it is easier than ever to track targets, send messages to them more effectively and condition those targets to be more receptive to your requests. The tools to effectively market your venture capital firms include;
Having Problem Solving skills
Indeed having a strong problem solving skill is a very necessary component to effectively market venture capital firms, especially when employing digital tactics.
Without doubt, creativity has always been an important component of any good marketing program, but a unique creative set that includes intelligent concepts is a winning combination.
Use your Intelligence
We all know that Intelligence is the one thing that most marketing agencies lack. Intelligent marketers are a must when marketing any financial firm.
Make use of Broadcast Advertising
There is no denying that the internet has had a dramatic impact on TV and radio advertising. Now instead of tuning in for information, most buyers now prefer to get their news and entertainment through online sources.
But for those who understand, broadcast advertising hasn’t disappeared entirely and venture capital firms are making use of the broadcast media to do specific aspects of their marketing and creating a platform for their firms.
We advise that you critically understand the limits and opportunities available in today’s broadcast advertising industry.
Leveraging on Technological Expertise
It is no longer a hidden fact that technology and strategy have become inextricably linked in our modern world. One of the things that need to be considered for your business is the need to create a presence and make use of modern technology that will boost your organization’s promotional firepower.
Handling Negative Publicity
As a new entrant in the industry, the worst way to take care of negative buzz is to put off developing a response until reporters are knocking on your door, demanding a comment from the company’s spokesperson. Always remember that the creation of a quality, crisis PR plan and the solid preparation of key stakeholders is a requirement for any venture capital firm interested in controlling negative messages and overcoming obstacles.
It is advisable that you track your firm’s progress, results or outputs with the aim of improving on them quickly as the case demands.
Always have it in mind that when it comes to holding onto your customers and building a loyal clientele base, you need to keep your ears open and take their complaints seriously. Make them feel like part of the business and offer them what your competitors can’t.
17. Develop Strategies to Boost Brand Awareness and Create a Corporate Identity
Some years back, communication in the venture capital business took place in an organic way through partner networks and personal connections, and also the outcome produced by the firm was independent, demonstrating the value and strength of a firm.
But it is no longer that way today because a venture capital firm is now virtually required to participate in building and growing its brand.
That includes from the Name, Logo and Colours to the Voice of the firm and what sets it apart from its competitors, all of these things are becoming more and more crucial to potential investors and business targets. Ways to boost your business may include:
- Construct an image and promote the brand
- You have to tell your story and stay consistent
- Define your offering
- Think outside the box
- Employ the best hands
- Follow up industry trends
- Work the balance sheet and calculate your loss
- Know who your competitors are