Fund Structure
What is venture capital?
Quick Answer
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.
Detailed Answer
Venture capital (VC) is an asset class within private equity where professional investors — called general partners (GPs) — raise pooled funds from institutional investors and high-net-worth individuals (limited partners or LPs) to invest in early-stage companies with high growth potential.
Unlike traditional lending, VCs take equity positions rather than debt, meaning they own a percentage of the company. They typically invest in rounds (Seed, Series A, B, C, etc.) and expect most investments to fail, but aim for a few breakout successes that return the entire fund.
The standard VC fund structure is a 10-year limited partnership with a "2 and 20" fee model: 2% annual management fee on committed capital, plus 20% carried interest (share of profits) above a preferred return hurdle.
Related Questions
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.
What is an LP in venture capital?
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.