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Venture Fund Formation Lawyer


Venture capitalists invest in the newest technologies, services, and business models at the forefront of innovation and transformation, driving economic growth and the US economy.

Although these funds have become more conservative in recent years, these investments carry exceptionally high risks and the opportunity for exceptionally high rewards. In 2021, VC funds reached a staggering 74% internal rate of return (IRR), while 2022 brought a crash to -17% IRR. For experienced managers who want to start their own venture capital fund, let’s learn more about the process and why you need a venture fund formation lawyer.

What Is a Venture Fund?

A venture fund is a specialized form of private equity fund. Each fund is a legal structure where partners are organized to pool and invest their funds according to a specific strategy. Like a private equity fund, venture funds invest in securities that are not available to public investors. Unlike a private equity fund, venture funds specifically invest in startups and early-stage firms, typically in companies with innovative technologies.

Venture capitalists fund the growth of a company, looking for their return at an eventual “exit,” typically when the portfolio company goes public or is sold through a merger or acquisition. For this reason, venture funds remain illiquid for long periods of time and are only suited to specific types of investors.

In the past, venture funds took an active role in the portfolio company’s management and development, providing consulting and advising and offering strategic guidance to the startup. Today, fewer venture capital funds take such an active role in nurturing portfolio companies, although different funds have different approaches.

Different Types of Venture Capital

The different types of venture capital investments correspond with the stages of growth of a portfolio company. Some venture capital funds specialize in only one stage of company development, while other funds invest throughout every funding series. The types of venture capital are:

Seed Capital

Seed capital supports a new enterprise to organize itself, form the company, and launch its first product. Since the company has no revenue from sales or services, it relies on investment capital to fund all its operations. Seed capital is typically used for administrative setup, research and development, or new product prototyping.

Startup Capital

At the startup stage, the portfolio company should have at least one full-time principal and a sample or prototype product. Investment capital at this stage is used to recruit key team members and refine their product or service to enter the marketplace.

Early Stage Capital

In the early stage, the portfolio company has a management team and has begun to earn some revenue from product sales. Investment capital is used to improve productivity or efficiency or improve sales and marketing in order to propel the company to the break-even point.

Expansion and Late Stage Capital

At these stages, the portfolio company may seek further funding to expand its product line, reach new markets, or achieve the next level of growth.

Mezzanine or Bridge Financing

Some venture funds focus specifically on bridge financing, used to fund a merger or acquisition or to finance an IPO. Bridge financing is short-term venture capital that funds the costs associated with this specific aspect of company growth and development.

How to Start a Venture Fund

Before starting a venture capital fund, you need to start a venture capital firm to manage the fund’s operations. The success of your firm will depend on your personal experience and track record of success, with a proven ability to find early-stage companies that achieve a “venture rate of return.” Often, you will also be expected to invest a significant amount of your own assets in your venture fund.

Starting your own venture capital firm is similar to starting any other business: you will need to choose the company type and register the business, fund daily operations like office space and administrative costs, and hire key team members. It is always a good idea to consult with an attorney during the business formation process in order to make early business decisions that protect your long-term interests and maximize potential.

Once your venture capital firm is created, here is an overview of the venture fund creation process:

Develop Your Investment Strategy

A new VC fund should have an investment strategy that has excellent potential returns, along with a focus or approach that differentiates it from other venture funds. The fund’s strategy will be encapsulated in a compelling investment thesis that attracts new investors.

Determine Your Fund’s Structure

Understanding the structure of your fund, including your financial model, partnership agreements, and management and other fees, will help you determine your fund’s revenue, expenses, and growth potential. This structure underpins both the fund and your venture capital firm and is essential for securing the confidence of new investors.

Conduct Due Diligence

Due diligence is time-consuming and expensive but critical for the success of a venture fund and a venture firm. Due diligence is the process of thoroughly investigating every aspect of your portfolio in order to assess risk and make the best investment decisions.

Financial due diligence reviews the finances of the portfolio company and assesses its financial health, while operational due diligence examines the business model and potential to generate sales and profits. Legal due diligence assesses the company’s contracts and agreements for legal risk, and it is also important to assess any risks or liability associated with the portfolio company’s management team.

Be mindful that your own VC firm and fund will also receive this level of examination by potential investors, and you should be prepared to comply with other due diligence processes. Speak with a venture fund formation lawyer early in the process to understand more about due diligence and how it may affect your fund.

Recruit Investors

Once you have thoroughly assessed risk and potential and have put together a great thesis and investment offer, you are ready to begin recruiting investors. Be mindful that investors will ask tough questions, and their feedback may help you refine and adjust your offer. Remember that, although you are the fund manager, the partnership of your investors is crucial and that you are building a long-term relationship.

Why Do You Need a Venture Fund Formation Lawyer?

The legal advice of a venture fund formation lawyer is essential at every step of the process. A venture fund lawyer will help you form a new business, including advising on contracts and agreements, articles of incorporation, and other legal matters. A venture capital fund is a form of legal partnership, and the terms of the partnership agreement are a critical part of your business plan and marketing strategy. They should be developed in partnership with an experienced venture fund formation attorney.

Investment firms are also subject to various state and federal regulations and oversight, and a VC fund will need to comply with SEC requirements and procedures, so a venture fund formation lawyer will ensure that you remain in compliance.

Finally, as potential investors perform their due diligence, your legal liability will be a matter of investigation. Having an experienced fund formation lawyer on your team with a great reputation will assure partners and investors that you mean business.

Contact the Fridman Law Firm Today

If you are considering starting a venture capital firm or a venture fund, the Fridman Law Firm offers comprehensive counsel with a deep understanding of technology, startups, and investments. For more information about how we can support your ambition, contact us online or call 212-262-9823 today.

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