How VC Funds Work
What is the difference between a GP and an LP?
A GP (General Partner) manages the fund — they make investment decisions, sit on boards, and earn carried interest. An LP (Limited Partner) provides the capital but has no management role. GPs run the show; LPs are the silent money.
Every venture capital fund is structured as a limited partnership with two distinct classes of participant.
General Partners (GPs) are the active managers. They raise the fund, source deals, conduct due diligence, make investment decisions, sit on portfolio company boards, and manage exits. GPs are fully liable for the fund's obligations (in theory, though this is usually managed through legal structures). They earn a management fee to cover operations and carried interest — typically 20% of profits — as their upside.
Limited Partners (LPs) are the passive capital providers. They commit capital to the fund but have no say in day-to-day investment decisions. Their liability is limited to the amount they commit — hence the name. LPs receive 80% of profits (after carried interest) and get their committed capital returned first before GPs earn carry. LPs can't be sued for the fund's actions beyond their committed capital.
Common LP types include university endowments (Harvard, Yale), public pension funds (CalPERS, CPPIB), sovereign wealth funds (GIC, Temasek), family offices, foundations, fund of funds, and high-net-worth individuals.
The GP/LP structure creates alignment: GPs are supposed to act in LPs' best interests because their carry is only valuable if the fund makes money. However, tensions can arise — management fees can create incentives to raise ever-larger funds, and information asymmetries favor GPs who know the portfolio better than LPs do.
Related glossary terms
Related questions
How does a venture capital fund work?
A VC fund pools capital from institutional investors and wealthy individuals, then deploys it into early-stage startups over several years in exchange for equity, aiming to return the capital with large gains when those companies exit.
What is carried interest and how does it work?
Carried interest is the share of a fund's profits that the general partners keep — typically 20% — and it's the primary way VC fund managers get wealthy.