Fund Structure
What are capital calls?
Quick Answer
Capital calls (drawdowns) are formal requests from GPs to LPs to transfer committed capital when needed for investments. LPs don't wire all their money upfront — it's called over 3-5 years as deals are made.
Detailed Answer
A capital call is the mechanism by which venture capital funds actually receive the money their LPs have committed. When an LP commits $10M to a fund, they don't transfer it all at once.
How capital calls work: 1. LP commits $10M to a fund 2. GP identifies an investment opportunity 3. GP issues a capital call notice (typically 10-14 days advance notice) 4. LP wires the requested amount (e.g., $500K) 5. Process repeats over the fund's investment period (3-5 years)
Typical call schedule: - Year 1: 20-30% of commitments called - Year 2: 20-30% - Year 3: 15-25% - Years 4-5: Remaining 10-20% (reserves for follow-ons)
Capital call notices include: - Amount being called per LP - Purpose (new investment, follow-on, fees, expenses) - Wire instructions and deadline - Running tally of called vs remaining commitment
Key considerations: - **Defaulting on a capital call** is extremely serious — LPs can lose their entire interest in the fund. - **Capital call lines of credit** — Many funds use short-term credit facilities to bridge capital calls, allowing faster deal execution. This can artificially inflate IRR.
Related Questions
What is venture capital?
Venture capital is a form of private equity financing where investors provide capital to early-stage, high-growth startups in exchange for equity ownership, typically expecting 10x+ returns over 7-10 years.
How do venture capitalists make money?
VCs make money through two streams: management fees (typically 2% of fund size annually, covering operating costs) and carried interest (typically 20% of fund profits above a hurdle rate, which is where real wealth is built).
What is carried interest in venture capital?
Carried interest (carry) is the share of investment profits — typically 20% — that fund managers (GPs) earn as performance-based compensation after returning LP capital plus a preferred return (usually 8%).
How do you raise a venture capital fund?
Raising a VC fund involves establishing a legal entity (LP structure), defining your thesis and target fund size, building a track record, creating fundraising materials (PPM, pitch deck), and securing commitments from LPs over 6-18 months.