What is recycling of capital in a VC fund?

Capital recycling is a fund provision that allows general partners to take money returned from early exits and reinvest it into new portfolio companies, rather than distributing it immediately to LPs. Most fund agreements allow some degree of recycling — typically up to 100-125% of committed capital can be invested in total over the fund's life.

Here's why it matters. Suppose a fund has $100M in committed capital. In year two, a portfolio company is acquired and the fund receives $15M in proceeds. Without recycling, that $15M would be distributed to LPs. With recycling, the GP can take some or all of that $15M and make new investments — effectively getting to deploy $100M of commitments plus $15M more, for a total of $115M in investments from a $100M fund.

Recycling is particularly valuable for funds that make early investments in very short-lived instruments like SAFEs or convertible notes, which may convert and return capital quickly. Without recycling, these early-stage instruments would use up committed capital without giving the GP the full runway to make their planned number of investments.

The mechanics are governed carefully in LP agreements. Most allow recycling of management fee offsets (money returned that's attributable to fees) and proceeds from investments that returned less than cost. Some allow broader recycling. LPs care about recycling caps because over-recycling can make a fund effectively larger than LPs originally signed up for — increasing risk without increasing commitment.

For GPs, recycling can meaningfully improve fund efficiency. A fund that recycles well can invest in more companies, improve diversification, and potentially increase both absolute returns and IRR. For founders, it matters less directly — but it's a sign that your investor has a healthy, active fund with capital available to deploy.