How VCs Make Money: the 2 and 20

Starting those conversations and considerations doesn’t actually start with your pitch, it starts with knowing how Venture Capital Funds operate and get paid; so that you can discern which firms are “in business” funding entrepreneurs.

Venture Capital Funds are Businesses

…and the Partners get paid

When raising venture capital this fact may be the most important thing for all entrepreneurs to know: How the VCs Make Money

Before you jump to the often advised conclusion that Venture Capital Funds seek exits or only big opportunities, appreciate first that Partners get paid.

Venture Capital Funds are businesses.

The typical structure is what’s referred to as 2 and 20 and knowing if/that/how/who operate as such, really changes the expectations both parties (you and them) have in exploring opportunities.

 2 and 20 refers to the business model that compensates VCs for running their funds

  • 2 – 2% of the capital in the fund is charged to the fund as an annual management fee. That fee is used to cover the cost of running the VC fund – salaries, rent, resources, and other overhead.
  • 20 – refers to a participation on profits: 20%. This is called carried interest (or often, just, “carry). After the investors in the fund get a return of their capital invested, under whatever terms are in place, then the VC(s) get 20% of any profits.

That’s a Venture Capital Fund’s business and what it means to you as a founder, is that you want to KNOW (and appreciate) IF a source of capital operates that way because the SIZE of the fund then establishes the kind of operating capital they have to work with, how much they could invest, and whether the fund is paying (employing) people that can help you (or not).

Let’s back up because that model can really be confusing and it’s rather transformative when you know how it works and why.

You might have noticed from time to time that I can be a bit of a stickler about what the word “Venture Capitalist” means and how that word is not the same as Angel Investor, Business Investor, etc. It’s always been my experience that Venture Capitalist refers to the Partners in such Funds.

Venture Capitalists raise money.

See, I told you knowing this might be transformative. Venture Capitalists raise the capital that they use to invest in startups.

Investors, in a sense, as such, are not “Venture Capitalists;” the investors are referred to as limited partners (“LPs”). Funds usually form as a limited partnership with the VC being the general partner (“GP”) managing the fund.

Why the Size of a Venture Fund Matters

Let’s say a “Venture Capital Firm” has a $100 million fund.

What that means is that the General Partner(s) have raised $100MM from investors and sources of capital, usually high net worth individuals (“accredited investors”), pension funds, foundations, and endowments. A 2% management fee is charged as a percentage capital meaning that each year, $2,000,000 is what the Fund/Firm has to work with to pay people, hire, and operate other resources

Note that there are technicalities, circumstances, and variations in which this isn’t exactly how it works and certainly not always how it works. For the sake of keeping it simple and upskilling everyone, let’s stick with the basics (should you be someone who knows this stuff better)

That fee is charged over the length of time General Partner(s) need the money to operate the business of managing the investments.

Meaning, say our $100MM fund invests into 10 companies over 10 years…

That’s $20MM (twenty million) that goes to just running the business. And $80MM in fact available for the investments. Thus, a glimpse into how much the Fund can actually invest in anything. Appreciating that any good startup investor is investing in at least 10 things (hoping to hit one good return), we’re looking at a firm that is likely little more or less than $8MM in any investment.

In time, the startups exit and let’s say the Firm ends up with $100MM PROFIT from the exits. As it comes back to the fund, over time, the LPs (the “investors”) get 100% of any cash until they get back whatever they have invested to date. Eventually, in our case, there is $100 million of profits to split. The General Partners get 20% of that, and the LPs get 80%.

Why this matter so much to understanding from where and how to raise capital?

That fund size matters.

The life of the fund (over what time frame they’ll invest), matters.

The investment thesis (in what and when/how) they invest, matters.

Their operating budget matters because a Venture Capital Firm is a business that should have resources available to help you!

A $10MM Fund under the same circumstances, would only have an operating budget of about $200k per year. That’s essentially just paying one person. And for 10 investments, we’re talking about $900k. Such a fund is genuinely a seed stage fund, more of an Angel Investor, and certainly not something you’d want to think of as the same as a Venture Capital Firm as in First Round Capital.

A $300MM Fund under the same circumstances is understandably structured as a business to be more involved in all that you do and to capably fund later rounds and/or follow previous rounds of funding. We’re working with an operating budget of $6MM a year in this case; that means Executives, EIRs, and other resources, such as their own PR firm, which you could (should) expect are part of the value of what they’re bringing to the table.

These questions and structures matter. Venture Capitalist is a JOB and a job means you can have expectations of the people doing that work; raising capital isn’t just a matter of you pitching, they’re raising capital too. Let’s get to work together.

LOUD Capital and Chicago Bulls Announce Semifinalists Featuring Collective Graduate GamerJibe

LOUD Capital, an early-stage alternative investment venture capital firm, in partnership with the Chicago Bulls announced today the 20 semifinalists for the first-ever Chicago Bulls Venture Competition, powered By LOUD Capital (CBVC), a pitch challenge that will provide a platform for start-up entrepreneurs with the opportunity to prove the worth of their business idea and value to the Chicago community.

Making it to the semifinal round are 20 submissions that were evaluated based on: strength of management team; value proposition/unique advantage; relevance of market identification/target audience; scalability; intangibles and funding readiness; impact on the Chicago community; and clarity and presentation. 

“Knowing that venture capital can be a very powerful and empowering pathway, we are always intentional about looking at historically underserved founders. I’m proud to say these 20 semifinalists are diverse and represent many different communities.”

Dr. Navin Goyal, co-founder and CEO of LOUD Capital.
  • Eight of the 20 companies (40%) have at least one minority founder or co-founder 
  • Six of the 20 companies (30%) have at least one female founder or co-founder 

Collective graduate of the second cohort of our program in Austin, TX, GamerJibe finds themselves among incredible company as result of the recognition.

GamerJibe is a platform for gamers and influencers to interact online. It enables gamers, game creators, and influencers to easily interact and do business with each other. GamerJibe allows online gamers to discover new games and other players, play games online with new friends, discuss topics such as gameplay strategy, and attend online virtual events.

Further Roster of the Chicago Bulls Venture Competition:

Charge Running
Charge Running is an app designed to enhance the running experience.

PromoShare
PromoShare is a peer-to-peer, word-of-mouth rewards platform for live events and brands.

FanFood
FanFood is a mobile ordering platform dedicated to enhancing the guest experience at live events.

TappedIn
TappedIn is a tech-enabled marketing and analytics company that connects consumers and the food and beverage industry at the critical point of purchase.

SplitGym
SplitGym is a peer-to-peer marketplace to buy and sell unused memberships at fitness studios and gyms.

Fanisko
Fanisko offers a one-stop fan engagement platform that helps brands increase mobile fan retention by using innovative digital engagement techniques while increasing revenue opportunities.

Pepper
Pepper is a connected cooking and nutrition platform. The Pepper smart kitchen scale, which offers integration with smart speaker Amazon Alexa, and guides the user with meal preparation and nutrition management.

Vous Vitamin
Vous Vitamin offers dietary supplements that use survey data and lifestyle information to create bespoke vitamin regimens for users. 

Spotivity
Spotivity is a dynamic and interactive search, mapping, and education app that helps enable users to maximize after-school time.

Gather Voices
Gather Voices offers software that automates creation, management, and publishing of digital videos.

Bitewell
Bitewell is a tech platform that connects users with meals that match their macronutrient and dietary preferences and fitness goals.

Tipoff
Tipoff is a multicultural digital team wordplay game. Revenue comes from app store sales of the game.

Gameday
Gameday allows fans to buy and sell ownership in new and existing sports teams through a tokenized trading exchange.

Honest Game
More than 800,000 high school students each year find themselves academically ineligible for collegiate athletics.

Careband
Careband is a safety and security system for patients with dementia that provides caretakers the ability to track the location of the individual.

PeopleVine
PeopleVine is a brand engagement and rewards platform with a portal that gives customers a place to view activities, number of visits, and any earned points/dollars.

Aurora Tights
Aurora Tights is an athletic brand that sells tights in an array of skin tones.

Good Neighbor
Good Neighbor is a mobile platform that seeks to bolster communication and collaboration among neighbors.

StreamLayer
StreamLayer is an audience engagement company focused on changing the way we watch live video.

“After an overwhelming level of interest in the first Chicago Bulls Venture Competition, we are impressed by the talented group of Chicagoland entrepreneurs named as semifinalists.”

Matt Kobe, vice president of business strategy and analytics, Chicago Bulls.
  • One winner will receive a $50,000 investment from LOUD Capital as well as legal, promotional, business development services that will be issued in phases. 
  • Each round of the challenge will be judged by Chicagoland professionals who have expertise in an array of sectors, including start-up development, professional sports, business, community engagement, and government.
  • Five finalists and one winner will be announced at halftime during a Bulls home game at the United Center on March 10. 

The remaining four contenders will have the option to work with Chicago-area startup incubator 1871 to continue to implement the content of their business plans to get their plans off the ground.

Blended Sense wins ‘Startup of the Year’ at Capital Factory’s annual Venture Summit

Blended Sense, a graduate of Collective’s inaugural cohort in Austin, TX, is a platform serving local small business owners and creative professionals. Founded in early 2019, the company made its way from our MediaTech incubator to the halls of the Capital Factory Accelerator late shortly after graduation. Its founders Abigail Rose, Albert Baez, and Georgina Elizondo Griffin are leading the way in content creation and media tech innovation.

Capital Factory’s 10th Anniversary celebrated their work with a Venture Summit recognizing its originating founders as well as their network of mentors, investors, and entrepreneurs, at the heart of downtown Austin’s startup community. The full-day summit featured a fireside chat with Ted Wang of Cowboy Ventures and Kerry Rupp of TrueWealth Ventures, a keynote from 1800-Contacts Founder (and Napoleon Dynamite producer), Jonathan Coon, and an acknowledgement of Startup of the Year.

“THEY AREN’T JUST AMAZING AND KIND PEOPLE, BUT THEY ARE ALSO HARD WORKERS LOOKING TO SOLVE A PROBLEM THAT SO MANY PEOPLE HAVE. IT MAKES ME ECSTATIC TO SEE SOMETHING LIKE…

BLENDED SENSE.”

Josh Baer; Founder, Capital Factory

The company seeks to match the right creative professionals to the right projects locally in order to produce and distribute quality content, quickly. They saw that the creative supply chain of today’s marketing sphere is outdated and disconnected in a time when creative services are in high demand because content has rapidly become the cornerstone of marketing for every industry. Quality creative services are not available to the small business owner and creative professionals are undervalued by traditional agencies.

Blended Sense is here to change all of that and more.

For more information about Blended Sense including: how to partner with the brand, purchase their services, or work within their network of freelancers, please contact [email protected] or connect with them online @blendedsense & @blendedsense.io

Collective Takes Home A Scootee!

There are few awards as coveted as the Golden Scooter. Artisan crafted by the recherché Alexandria Marr, Scootee holds it’s place among Oscar, Nobel, and Palme d’Or.

Collective rode home on the inaugural Golden Scooter.

Born of impassioned startup advisors and program Directors from throughout Texas, Marr took upon herself the mission of creating an experience in which the tables are turned for startup founders. Seeing that mission through, supported by DecentBridgepoint Consulting, and Galvanize, Marr found herself at the microphone in front of one of Austin Startup Week’s most notable crowds.

Accelerator & Program Reverse-Pitch

16 programs took the stage throughout the evening but only one would find itself in possession of the first Scootee in history.

The evening was genuinely and incredible and collective effort to help entrepreneurs better know the programs and accelerators that might be a best fit for what they’re doing. While 16 took the stage, Central Texas and the global hub of innovation that Austin is becoming, is now home to some 25 startup oriented curricula and platforms designed specifically with new founders, new ventures, and innovation in mind.

Founders are drilled on their pitch deck, their elevator pitch, and their presentation skills as they plan, prepare, and practice, to bring their ventures to life. Austin Startup Week’s Reverse-Pitch gala put the programs on stage to pitch so that a room of hundreds of founders could hear first hand how the programs work and what they do best for entrepreneurs.

Alexandria Marr could have turned to no one better than Roman Gonzalez, founder of Gardenio, to share the stage in hosting the celebration. As the lights dimmed and hush lulled over the crowd, a spotlight found each of these programs in the hotseat:

  • Tarmac TX – Fostering early-stage startups offering science and technology-based solutions for social and environmental issues.
  • SputnikATX – The accelerator that funds maker-founders; helping people reach their full potential by creating an ecosystem to attract hard-working nerds, connect them with investors, and train them for success.
  • SKU – THE consumer products accelerator; educating and equiping companies with market-validated products for growth into world class brands.
  • Techstars – Over 1,600 companies developed into a combined market capitalization of $18.2bn through this worldwide network.
  • Capital Factory – Focused on helping startups raise funding and increase customer growth by providing coworking space, hosting credits, a Startup Evangelist to advocate for your startup, and access to a mentor network in Texas.
  • Founder Institute – The world’s largest pre-seed accelerator for aspiring and idea-stage entrepreneurs up to the challenge; a comprehensive program to launch a startup with a global network of entrepreneurs to help you be successful
  • SEAL– Austin Technology Incubator’s Student Entrepreneur Acceleration and Launch program which picks the most promising startups emerging from the wide range of entrepreneurial programs to help them confront the next Go / No-Go decision. 
  • DivInc – Bridging the gap between underrepresented entrepreneurs and the resources they need to build profitable, high-growth companies.
  • MassChallenge– A global, zero-equity startup accelerator that has accelerated more than 1,900 startups that have raised more than $4.3 billion in funding and generated $2.5 billion in revenue.
  • Newchip – Making the knowledge, the network, and the communities that develop around strong accelerator programs available to everyone regardless of stage and location in the world.
  • Build Sec Foundry – A long-term incubator helping founders launch security product startups with a community of security professionals and entrepreneurs that provide teams space, mentorship, and access to the most critical services a company needs.
  • Quake Capital – A seed stage venture capital fund and growth accelerator program with funding specific to companies that come through the program and are about more than just money.
  • Impact Hub Accelerator – A free acceleration program based in Austin, TX that develops and brings to market a cohort of solutions focused primarily and purposefully on affordability and workforce development.
  • Texas Venture Labs – Accelerating startups in taking their innovations to market and transforming graduate students into entrepreneurs and business leaders.
  • Bunker Labs – Helping veteran entrepreneurs and military spouses find the quickest route to a successful business; inspiring and equipping with right training and connections to grow those businesses.
  • Collective – Your venture developed from idea to incorporation, in a media and technology focused incubator designed with you in mind; helping you realize the full potential of your talent whether you’re an artist or entrepreneur.
Marr and Nelson??

As Bunker Labs left the stage, a younger, svelte and sophisticated, Willie Nelson stepped to a microphone, guitar in hand. Surely, this must be the latest Health and Pharma program, introducing the latest innovation in aging and stem cell / DNA technology.

And has his lips parted, angels sang, and it was questionable whether or not this was Willie with an overdose of Neutrogena Rapid Wrinkle Repair Night Moisturizer.

John Zozzaro at the microphone introduced the program of which we’re so personally vested and passionate, that artists and entrepreneurs can meet in the middle through technology and in media innovation, as a collective, we help one another thrive.

Zozzaro struck a chord that night in Austin; a hat tip to the storytellers and songwriters who remind us that even a startup is a matter of passion, creativity, and narrative that makes us sing.

As though everything was right in the world, Impact Hub’s Accelerator, the program through which our Collective was born so that we might focus on impacting our workforce and future, took second. And as you roam the streets of Austin considering that Bird or Lyft, or as you join us in Collective, you might catch a glimpse of that golden scooter; unparalleled artistry and ingenuity thanks to the entrepreneurs of Texas.

Learn more about what we’re doing here