Exploring the kind of investing you can’t do with just a click of a button.
By Jenny Hoff, Photo by Alexander Grey
In this month’s second feature story, we focus on the handful of female general partners at venture capital funds in Austin helping get more female entrepreneurs funded for business expansion. But where do these heads of VCs get the money to invest in these companies? It comes from investors who are aiming to make much more than they could in the traditional stock market and putting their money in VCs that they believe are finding the kinds of companies that can deliver those returns. It’s a higher-risk investment strategy, but the reward potential is much greater.
Investing in a typical diversified stock fund will double your money, on average, every seven years. While the returns in VCs are much more volatile, making it hard to pin down an exact number, the hope for investors is that they could make three to four times their investment in that same amount of time.
“When trying to invest with a VC, it still has a ‘good ol’ boys network’ feel,” says Kerry Rupp, co-founder of True Wealth Ventures, a VC that invests exclusively in female-led businesses. “It doesn’t get exposure to a wider audience, giving more people a chance to get into the space.”
It’s important to note that while venture capital funds require a substantial commitment amount to enter into a partnership, you don’t have to hand over the entire amount up front. Typically, you will spread out your commitment that you agreed upon during the subscription period over three to five years with quarterly payments. For example, if you commit $500,000 to a fund, you would likely be paying $25,000 every three months over the course of five years. Since you may get some returns before you’ve invested the entire commitment amount, that could offset actual cash out of hand you need to pay.
We are talking big numbers here, but in a city where many women have high-paying jobs and substantial savings, knowing what options you have to invest those savings is vital. The rich get richer because they know how to make their money grow exponentially.
Not every fund requires such a high commitment. Some funds have a minimum of $250,000, spread out over three to five years; others may go as low as $100,000.
Besides having to meet the minimum commitment amount prescribed by the VC, you’ll have to meet certain requirements before being able to invest in it. It’s up to a VC to do its due diligence and make sure investors are “accredited” according to the U.S. Security and Exchange Commission rules. This isn’t a certification you receive but, rather, documents you’ll need to provide to the fund to prove you meet one of these two standards:
- A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
- A natural person who has an individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person.
Additionally, you’ll need to know when firms are raising funds, and that goes back to Rupp’s description of a good “ol’ boy’s network.” Do your research, make connections with funds you’re interested in and ask good questions. Then you’ll be in a position to make educated decisions on the best way to make your money grow.
To learn more, sign up for True Wealth Ventures newsletter and attend one of their VC primer seminars via Zoom.