Venture capital is a type of financing reserved for early-stage investments in startups. They typically tend to be in high-growth, high emerging types of companies. The types of companies that we aspire to be public someday or to find their path towards a strategic exit from one of the major companies.
How Venture Capital Works
This is a high-risk, high-reward asset class which is something that many people want to get involved in but sometimes don’t have the stomach to bear that risk. Typically, venture capitalists will fundraise, then manage funds with a management fee. They have limited partners that live behind the venture capitalists which are called general partners or managing partners. They raise these large funds, then they can collect a management fee on top of those funds from these limited partners. The investors in the venture capital funds work really hard to pick good companies to invest in to provide return for those limited partners. In essence, the venture capitalists are working for another class of investors. So in a way they’re representing finances and money of wealthy individuals, institutionals, pension funds, endowments and passing that through into this high-growth asset class called startups.
Why Venture Capital Needs to Change
We think the whole model needs to evolve. The whole model needs to change. The venture capital market has been around for 40-50 years. It really took hold in the 90s into the 2000s and it’s been operated the same way with a 2% management fee and a 20% carried interest fee. Think of it like a fee on the gain of the investment. So the upside investment, think of it almost like a commission fee, you pay only on returns.This is something that has been in existence, the two-and-twenty rule across venture capital, private equity, hedge funds for decades and decades and there needs to be a new model. There needs to be a shift in the norms.
At York IE we are committed to those shifts, so follow along to learn more about how we’re going to change the game in venture capital.