How 2 Understand Fund Economics
The following post is from Yushan Lou ’18, a Butler Venture Accelerator team member.
Earlier this spring, the Blank Center was lucky to have Amy Choi’07, MS’07, Brendan Quinn M’12 and Derek Scalf from Silicon Valley Bank host a #How2Tuesday. Silicon Valley Bank (SVB) provides targeted financial services and expertise through its offices in innovation centers around the world. The company focuses on lending to technology companies, providing multiple services to venture capital and private equity firms that invest in technology and biotechnology, and also on private banking services for high-net-worth individuals. In this session, we learned about different types of funds. Here are some of my major takeaways!
Different types of funds.
There are three common types of funds. The first fund type is Venture Capital. They typically invest in early to growth stage companies and it is mostly related to technology/innovation, life sciences or clean tech. Venture Capitalist investor is essentially a professional group that looks specifically for startups to fund. As you might imagine, this option has a lot of money available to offer to startups and plenty of resources to actually help your business grow.
The second type is Private Equity. It is an asset class that invests private money into operating entities. This type of fund is typically invest in middle market or late stage operating entities with revenue more than $50,000. Even though the industries are not limited, most of private equity investment are in real estate. For private equity, as an investor diversification is the key. Investing in a number of a companies simply gives you more chances to support a company that really can take flight. Find an industry you understand and take the time to make multiple investments rather than one.
Fund of Funds are the third type of fund. It is a fund that invested in other funds (either VC or PE) rather than directly in specific asset, which provides diversification and access to broader range of funds. This is not very usual for startups.
For entrepreneurs who are seeking for financing for their business, Venture Capital and Private Equity are two common sources. However, entrepreneurs should also take a look at alternatives such as crowdfunding or angel investing. Crowdfunding is the newer way of funding a startup. Anyone can contribute money toward helping a business that they really believe in. Angel investors work similarly to venture capitalist except they are typically a smaller operation, sometimes only one person. Angel investing is a popular option for those who are really serious about funding a startup because it allows you to keep control over your company, earn mentorship when it is needed, and hopefully make money as your company continues to grow.
See you for our first #How2Tuesday first week of October!
What are #How2Tuesdays?:
Want to learn something really practical to get your startup moving in the right direction? #How2Tuesdays are short, workshop style sessions meant to bring you very specific, user friendly instruction on some of the most important things you need to know how to do for your venture. Every Tuesday at 5pm in the Blank Center!