I’m starting a micro venture capital business & I need help

QUESTION:

I need help creating the business model for a venture capital firm that caters to small and micro-businesses. Also, I would like to know what critical factors I need to assess in running this type of business.

ANSWER:

by RJ Johnston

Critical factors to consider when starting this type of entity are the type of entity, where you will receive capitalization, and your target market.

For a small investment or micro-loan business you need look no further then the SBA for capitalization assistance. Specifically their prospective lender section located at http://www.sba.gov/financialassistance/prospect…. There are restrictions.  Most of the approved entity types are non-profit organizations; however, don’t be discouraged if this is not your path.  Other programs do exist through the US Treasury department, and funding can be found at investment firms such as Goldman Sacks (http://www2.goldmansachs.com/our-firm/press/pre… ) assisting for-profit and non-profit companies alike.

Your target market is important.  Recent successes include increasing access to capital for minorities, offering alternatives to payday high interest rate lending, and small business equity investments which are creating jobs in local economies. Choose your path and execute.

Good luck!

Comments & Advice:
  1. Naomi Kokubo says:

    Even a small venture capital business requires significant equity — usually $5 million and up. In order to raise the necessary funds, you need to have an experienced team. If you haven't worked in investment banking or as a VC, it's unlikely you'll be able to raise the capital necessary to launch your business.

    I'd suggest that you look into either joining a VC and spending a few years learning the ropes, or if you have money to invest, you can join an angel group and invest with them. Either way, you'll get good exposure to the economics of running a venture business.

    Keiretsu Forum is a good place to start:
    http://www.keiretsuforum.com

    There's also Sand Hill Angels:
    http://www.sandhillangels.com/

  2. RJ Johnston says:

    Critical factors to consider when starting this type of entity are, the type of entity, where you will receive capitalization, and your target market.

    For a small investment or micro loan business you need look no further then the SBA for capitalization assistance. Specifically their prospective lender section located at http://www.sba.gov/financialassistance/prospect…. There are restrictions, most of the approved entity types are non-profit organizations; however, don't be discouraged if this is not your path, other programs do exist through the US Treasury department, and funding can be found at investment firms such as Goldman Sacks (http://www2.goldmansachs.com/our-firm/press/pre… ) assisting for-profit and non-profit companies alike.

    Your target market is important, recent successes include increasing access to capital for minorities, offering alternatives to payday high interest rate lending, and small business equity investments which are creating jobs in local economies. Choose your path and execute.

    Good luck!

  3. RJ Johnston says:

    Agreed, either learn from VC by working with them, or recruit a reputable VC onto your advisory board, assisting as you grow.

  4. John Frankel says:

    This is tough to do, but we started on this path in 2008 and haven't looked back. Happy to give you specific advice.

  5. Suvam Roy says:

    John Frankel, can you please provide some information on what % shares of the startups do the VCs keep and how much is offered to the investors??

  6. Joe Davis says:

    Suvam,

    Market industry is 2% management fee of the size of fund (although some “micro” funds and larger reputable funds can charge 2.5 – 5%)

    The reason for this being with £5m fund you won’t have much overhead leeway.

    The Upside/Profit retained by the fund manager is normally 20% – the running costs incurred (the 2% management fee therefore acts as a loan).

    This is the typcial format of most firms.

  7. Shiva says:

    Dear Sir Please send details of small microfinance business started procedures.Regards, Shiva Access financial services

  8. VC Entrepreneur says:

    Hi Joe Davis –

    Can you expound on the %?

    Q1: The 2% – 5% management fee of the size of fund is that a monthly fee or 1-time?

    Q2: The ‘Upside/Profit’ of 20% is that on all annual ROI for whatever investments the fund is managing?

    For Q3 just using fictitious figures to make it easier to understand.

    Q3: If we raise $100K from 10 investors and have a total of $1M – if we retain 20% of all annual profit does that mean if we have $1M in profit in year1 that we would receive $200K and the other 10 funders would receive 80%/$800K between them $80K each)?

    Thank you in advance for whatever direction in the form of an answer you can provide.

    Appreciate it much.

    VC Entrepreneur

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