ONLINE CHAPTERS
20-2a TYPES OF VENTURE CAPITAL FUNDS
When discussing venture capital, it is important to differentiate carefully between institutional venture
capital funds and angel capitalists. Institutional venture capital funds are formal business entities in which full-
time professionals seek out and fund promising ventures, whereas angel capitalists (or angels) are wealthy
individuals who make private-equity investments on a more ad hoc basis. A vibrant market for angel
capital routinely provides billions per year in total equity investment to private businesses in the United
States. In many years, the amount of capital provided by angel capitalists rivals that invested by venture
capitalists. Nonetheless, we focus on the former group because these companies operate nationally and
provide the performance benchmark against which all private equity investment is compared. Although
statistics on angel capitalists are difficult to find, the role of angel investors in nurturing the growth of
new businesses has been highlighted in a successful television program, Dragon’s Den, which originated
in the UK but has been copied in a number of countries, including Australia. (A current version of the
series is named Shark Tank.) On the show, entrepreneurs and inventors pitch their ideas to try to obtain
funding and advice from a number of angel investors.
There are a number of main categories of institutional venture capital funds. First, financial venture
capital funds are subsidiaries of financial institutions, particularly commercial banks. These are generally set
up both to nurture companies, which will ultimately become profitable customers of the corporate parent,
and to earn high investment returns by leveraging the financial expertise and contacts of existing corporate
staff. Second, corporate venture capital funds are subsidiaries or stand-alone companies established by non-
financial corporations, which are eager to gain access to emerging technologies by making early-stage
investments in high-tech companies. Finally, venture capital limited partnerships are funds that are established
by professional venture capital companies. These companies act as the general partners – organising,
investing, managing and ultimately liquidating the capital raised from the limited partners. Most limited
partnerships have a single-industry focus that is determined by the expertise of the general partners.
In the US, there are also small business investment companies (SBICs), which are federally chartered
corporations established as a result of the Small Business Administration Act of 1958.
LO20.2
institutional venture
capital funds
Formal business entities
with full-time professionals
dedicated to seeking out and
funding promising ventures
angel capitalists
Wealthy individuals who make
private equity investments on
an ad hoc basis
financial venture capital
funds
Subsidiaries of financial
institutions, particularly
commercial banks
corporate venture capital
funds
Subsidiaries or stand-alone
companies established by
non-financial corporations
to gain access to emerging
technologies
venture capital limited
partnerships
Funds established by
professional venture capital
companies, and organised as
limited partnerships
FIGURE 20.1 FUNDS RAISED BY THE AUSTRALIAN VC AND PE INDUSTRY
This figure details the funds raised by Australian VC and PE funds over the 10-year period to June 2014.
FY06FY07FY08FY09FY10FY11
VC funds PE funds
FY12FY13FY14FY15
No. of funds
A$m
0
3
6
9
12
15
0
100
200
300
400
No. of funds
A$m
FY06FY07FY08FY09FY10FY11FY12FY13FY14FY15
0
5
10
15
20
0
2,000
4,000
6,000
8,000
10,000
Amount (A$m)
No. of funds
Amount (A$m)
No. of funds
Source: Australian Private Equity and Venture Capital Association Limited. Used with permission. 2015 Yearbook: Australian Private Equity and Venture Capital Activity Report, November
- AVCAL in partnership with Ernst & Young, p. 8.