How does a co-investment Leveraged Venture Capital Fund Work?

To understand how a leveraged venture capital fund works, you first need to understand some basics of how a traditional VC fund operates.

VC funds collect capital from Limited Partners who invest in the fund.  The fund then invests this capital, assists the companies in growing and working towards a liquidity event and then returns capital and profits to investors.  The fund typically charges a 2% management fee and 20% carried interest to compensate them for all the work.  This means that after an investor receives 100% of their investment back, they also get to keep 80% of the profits.

A leveraged fund works just like a regular fund, except that it works double hard to benefit Limited Partners by creating “syndicates” or groups of investors on a platform like AngelList which then charges a carried interest to those platform investors.  The AngelList carried interest is also 20% and the platform keeps 5% and the syndicate lead, who in this case is the venture capital fund, gets to keep the 15% carried interest which it then distributes to its Limited Partners.

So how does this work?

Imagine that the VC is going to invest in a company that is looking to raise $1 million.  The VC may invest $500,000 of its own money in the company and then act as syndicate lead on AngelList for the remaining $500,000.  If the company was selling 20% of its equity, then the VC would own 10% and the AngelList syndicate would own another 10%.  Now imagine that the company has a 3X exit, so the VC gets $1.5 million and $1.3 million is distributed to Limited Partners.  (LPs get their original $500,000 plus 80% of the $1 million profit)  The AngelList investors get $1.3 million too.  But now, the VC also received another $150,000 in carried interest from the AngelList syndicate which is also distributed to its LPs (less the 20% carried interest), so they receive an additional $120,000.  The LPs thus had only an 8% net carried interest on the deal thanks to the leverage strategy and they put an additional $120,000 in their pockets which they would not have seen from a traditional VC fund.

For a leverage fund to work it has to have all the elements of a great Venture Capital fund in the first place.  They have to have a lot of deal flow and have the ability to pick the best opportunities and coach them along the way to a successful liquidity event.  They need to have a solid portfolio of companies that would provide excellent profits to LPs without the leverage.  But if all these things are in place, and then a leverage component can be added, then Limited Partners can see a significant benefit.

To learn more about Rockies Venture Fund and leveraged VC fund investing, visit us at www.rockiesventurefund.com

The post How does a co-investment Leveraged Venture Capital Fund Work? appeared first on Rockies Venture Club.