ACCA Advanced Financial Management (AFM) Practice Exam

What is the typical duration of a venture capital fund?

1. 5 years

2. 10 years

3. 15 years

4. 20 years

The correct answer is: 10 years

Venture capital funds typically have a duration of around 10 years. This timeframe is designed to allow fund managers sufficient time to identify promising startups, provide the necessary support for their growth, and eventually exit their investments either through public offerings or sales to other companies. Over the first few years, the focus is on making investments, while the later years are dedicated to nurturing those investments and seeking profitable exits, which can significantly impact the overall success and returns for investors. While the fund's legal life is usually set at around 10 years, many funds do incorporate extensions, allowing them to manage portfolio companies longer if necessary, which can sometimes extend the lifecycle to about 12-15 years. In contrast, the shorter durations of 5 years might not provide enough time for substantial growth of invested companies, while durations of 15 or 20 years can be atypically long, potentially leading to conflicts between fund managers and investors regarding returns and liquidity. Therefore, 10 years stands as the most accurate and typical duration for venture capital funds.