As I have once read, a Venture Capital Fund, is a self-explained notion. But I’ll agree with you, it may not be so intuitive.
In this paper, I will take the time to explain simply how a VC fund works.
Here is the program
1. What is the purpose of a VC fund?
2. How can we describe a VC fund?
3. How a VC fund is structured?
4. What responsibility has a GP ?
5. What is the economic structure of a VC fund?
What is the purpose of a VC fund?
VC funds fill a void : VC fund is the only alternative some entrepreneurs could turn to, because of the high risk of their ideas. In fact, banks have some limitations regarding the interest charged on loans : Banks cannot lend money at more than a certain rate. But the more risky it is to invest in a startup, the higher the rates, and these rates usually exceed this limit. For startups founders that mean no fund from traditional funds and this is where the VC funds come in!
How can we describe a VC fund?
A venture capital fund is a pool of money raised from different organizations and managed by a team of experts which invest the money into a portfolio of promising and high-risk startups. These “experts” expect competitive return on their investments.
How a VC fund is structured?
General partners : general partners are investment professionals who acquired the responsibility of managing the fund. They are concerned by the day-to-day running of the fund. They make the startups investments.
Limited partners : the limited partners are the ones who invested in the funds. Limited partners include :
Institutional actors such as pension funds or university endowments – the university assets donated to academic institutions (in the US mostly).
Wealthy individual with a net worth of over $1 million.
Good to know: The LPA – Limited Partnership Agreement- is the agreement who sets out the conditions of the partnership (the strategy, the responsibilities of each actor etc).
What responsibility has a GP ?
GP responsibilities include:
Raising funds from LPs
Sourcing top startups
Performing due diligence
Delivering returns back to investors in the fund (LPs)
Providing value-add to fund portfolio companies beyond just capital, including introductions, advice, introductions to follow-on investors, etc.
What is the economic structure of a VC fund?
A VC fund uses the standard model in the investment fund industry, the “2 and 20”:
The number 2 refers to the percentage retained for annual management fees, usually 2%.
The number 20 refers to the percentage of the profit that goes to the GPs, usually 20%. In the industry, this share of the profit is called “the carry“.
The rest of the profit goes to the Limited Partners.