HOW DOES A VENTURE CAPITAL FIRM WORK

There’s more money than ever in the startup funding market across all funding stages. In previous articles we discussed the financing options available to startups and also the criteria used by investors when deciding which startups to back. Now it’s time to get a little bit closer to the elephant in the room: Venture Capital firms.

As we’ve previously mentioned, Venture Capital is a form of a financing that’s self-explained: it consists of funds or firms that provide ‘venture capital’, meaning high risk capital that supports companies and organizations with the hope that these provide a great return on investment (ROI).

There are many terms associated to the Venture Capital industry that might not be known to other investors and entrepreneurs, and in this article we’ll try to explain the main ones.

There are two key elements within a VC fund: general and limited partners. The general partners are the people in charge of making investment decisions (finding and agreeing to terms with startups and companies) and working with startups to grow and meet their goals. On the other hand there are limited partners, the people and organizations who provide the capital necessary to complete those investments.

In other words, general partners make the investments and limited partners provide the funds.

This is one of the key differences between VC funds and other investment vehicles: Venture Capital funds don’t invest the money of their own partners, but that of limited partners such as pension funds, public venture funds, endowments, hedge funds, etc. General partners might invest some of their own money through the fund, but this tends to account for only 1% of the size of the fund.

 

Leave a Reply

Your email address will not be published. Required fields are marked *