{"id":1897,"date":"2015-01-07T10:00:17","date_gmt":"2015-01-07T09:00:17","guid":{"rendered":"https:\/\/startupxplore.com\/en\/blog\/?p=1897"},"modified":"2018-12-03T17:11:21","modified_gmt":"2018-12-03T16:11:21","slug":"how-does-a-venture-capital-firm-work","status":"publish","type":"post","link":"https:\/\/startupxplore.com\/en\/blog\/how-does-a-venture-capital-firm-work\/","title":{"rendered":"How does a Venture Capital firm work?"},"content":{"rendered":"

There\u2019s more money than ever in the startup funding market across all funding stages. In previous articles we discussed the financing options available to startups<\/a> and also the criteria used by investors when deciding which startups to back<\/a>. Now it\u2019s time to get a little bit closer to the elephant in the room: Venture Capital firms<\/strong>.<\/p>\n

As we\u2019ve previously mentioned, Venture Capital is a form of a financing that\u2019s self-explained: it consists of funds or firms that provide \u2018venture capital\u2019, meaning high risk capital that supports companies and organizations with the hope that these provide a great return on investment (ROI).<\/p>\n

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\u2019ll try to explain the main ones.<\/p>\n

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How does a Venture Capital firm work?<\/h2>\n

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.<\/p>\n

In other words, general partners make the investments and limited partners provide the funds.<\/p>\n

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‘Just because you get funded does not mean you are successful’ – Vinod Khosla<\/a><\/div>\n

Click To Tweet<\/a><\/p>\n

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This is one of the key differences between VC funds\u00a0and other investment vehicles: Venture Capital funds don\u2019t 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.<\/p>\n

Does this mean that VC firms also need to \u2018fundraise\u2019?<\/h2>\n

Yup, that\u2019s exactly right. Startups need to fundraise to convince Venture Capital firms, business angels, etc to give them money in exchange for equity. The case for VC firms is similar. General partners must convince some of the organizations aforementioned to invest in the fund with the promise of big returns (between 5X and 10X) in a certain period of time (usually 10 years).<\/p>\n

The VC firms must then go on to make clever investments so they can give the limited partners their money back\u2026 plus a profit.<\/p>\n

How do Venture Capital firms make money?<\/h2>\n

\"startupxplore<\/a><\/p>\n

The way Venture Capital funds\u00a0make money are two fold: via management fees and carries (carried interest).<\/p>\n