Wordwide Venture Capital Investment Structures

Investment into venture capital can take various forms and structures, depending on the legal, regulatory, and financial environments of different countries. Here are some common structures used for venture capital investment around the world:

1. Venture Capital Funds

• Limited Partnerships (LPs): This is the most common structure for venture capital funds. The fund is typically set up as a limited partnership where the general partner (GP) manages the fund and makes investment decisions, while limited partners (LPs) provide capital but have limited involvement in management. This structure is popular in US and many European countries and the UK. (Available in many jurisdictions like Caymans, Singapore, Luxembourg, Ireland, USA, UK)
• Closed-End Funds: Many European VC firms operate as closed-ended funds. These funds raise a fixed amount of capital and invest it over a set period. They are not open to new investors after the initial fundraising period. (Jersey, Guernsey, Malta, Ireland, Luxembourg, BVI)
• Open-End Funds: These funds allow for continuous investment and redemption, providing more liquidity to investors. (Can be tricky with VC- it is)
• European Venture Capital Funds: This regulatory framework was established by the EU to market funds across EU states.
• Alternative Investment Funds: the Alternative Investment Fund Managers Directive provides the framework for alternative investments in the EU.

2. Corporate Structures

• C Corporations: In some jurisdictions, venture capital firms may be structured as corporations, allowing them to raise capital through equity issuance. This structure can be beneficial for tax purposes and attracting institutional investors.
• S Corporations: In the U.S., S Corporations can be used for smaller venture capital firms, but they have restrictions on the number and type of shareholders. They are flow through vehicles for tax purposes.
• Venture Capital Companies some jurisdictions offer a variety of structures that can be utilised for VC for example the Mauritian Variable Capital company is an interesting structure.

3. Trusts

• Investment Trusts: In some countries, venture capital can be structured as an investment trust, allowing investors to pool their money and invest in a diversified portfolio of venture capital investments. VCTs are well established vehicles for VC investments providing tax relief to investors while Australia has Early Stage Venture Capital Limited Partnerships and France has a system of FIP and FCPI that provides tax incentives for investing in small and innovative companies.
• Unit Trusts: Similar to investment trusts, unit trusts allow investors to buy units in a trust that invests in venture capital opportunities.

4. Special Purpose Vehicles (SPVs)

SPVs: These are legal entities created for a specific investment purpose, often used to pool capital from multiple investors to invest in a single startup or project. SPVs can be structured as LLCs, partnerships, or corporations. There are also Protected Cell companies and incorporated cell companies available in a few jurisdictions.

5. Syndicates

• Angel Syndicates: Groups of angel investors come together to invest in startups, often pooling their resources and sharing due diligence efforts. There are numerous syndicates in Africa (a relatively nascent market for VC) including African Business Angels Network, Cape town Angels, Nigeria Angel Network, East Africa Venture Association, Startupbootcamp Africa, VC4Africa, African Angel Network. There is also a rapidly growing movement towards gender-based investment and various networks, funds and firms focused on this area.
• Online Platforms: Platforms like AngelList, WeFunder, SeedInvest, Republic, Crowdcube, StartEngine and Fundable allow individual investors to participate in syndicates led by experienced investors.

6. Government and Development Funds

• Public Venture Capital Funds: Some governments establish funds to invest in startups and promote innovation, often with a focus on specific sectors or regions. (examples British Business Bank and BPIFrance)
• Development Finance Institutions (DFIs): These are government-backed entities that invest in venture capital to promote economic development in emerging markets. (examples World Bank IFC (USA) and European Investment Bank)

7. Family Offices

Family Investment Vehicles: Wealthy families often create single or multiple family offices that invest directly in venture capital opportunities, either through direct investments or by committing capital to funds.

8. Institutional Investors

Pension Funds and Endowments: These entities often allocate a portion of their portfolios to venture capital funds, either directly or through fund-of-funds structures depending on their local regulation and mandates. In South Africa Regulation 28 of the Pension Fund governs such investments along with the Rules and the Investment Policy Statement.

9. Fund-of-Funds

Venture Capital Fund-of-Funds: These funds invest in a portfolio of venture capital funds rather than directly in startups, providing diversification for investors. The idea is to invest with managers with successful track records.

10. Crowdfunding Platforms

Equity Crowdfunding: Platforms that allow individual investors to invest small amounts in startups in exchange for equity, democratizing access to venture capital investments.

11. Corporate Venture Capital

Corporations investing in startups and innovative technologies have become prominent in USA (eg Google, Intel, Salesforce and GM) , Germany (BMW, Bosch, Siemens), UK (Barclays, Vodaphone, Unilever). France (Total, Orange, Loreal) , India, Japan, China, South Korea to name a few…

Conclusion

Different jurisdictions have different regimes for Private Equity and Venture Capital. Emerging markets, being newer, are adopting various structures from Development Markets. The choice of structure for venture capital investment depends on various factors, including regulatory considerations, tax implications, investor preferences and the specific goals of the investment vehicle. Each structure has its advantages and disadvantages and investors should carefully consider these when deciding how to participate in venture capital.