Fund Structure
What is an LP in venture capital?
Quick Answer
An LP (Limited Partner) is an investor who contributes capital to a VC fund but has no active role in investment decisions. LPs include pension funds, endowments, family offices, fund-of-funds, and high-net-worth individuals.
Detailed Answer
Limited Partners (LPs) are the capital providers in a venture capital fund. They commit capital to the fund and receive returns when investments are exited, but they do not participate in day-to-day investment decisions.
Types of LPs: - **Institutional LPs** — Pension funds, university endowments, sovereign wealth funds, insurance companies. Typical commitment: $10M-$100M+. - **Fund-of-Funds** — Funds that invest in other VC funds. They provide diversification for their investors. - **Family Offices** — Wealth management firms for ultra-high-net-worth families. Often more flexible and faster to commit. - **High-Net-Worth Individuals (HNWIs)** — Accredited investors committing $100K-$5M individually. - **Corporate LPs** — Companies investing for strategic access to innovation.
LP economics: - LPs pay management fees (2%) and carried interest (20%) - Capital is "called" over 3-5 years (not all invested at once) - Returns distributed as exits occur (distributions) - Fund life: typically 10 years with optional extensions
LP due diligence focuses on: GP track record, team stability, strategy differentiation, fund terms, and operational infrastructure. First-time fund managers often raise primarily from HNWIs and family offices, as institutional LPs typically require 2-3 fund track records.
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.