TL;DR - Venture Capitals use funds from LP to create a pool that they invest in different companies with an end goal of liquefaction.
Helpfulness - 4
Tags - fund structures, VC compensation, VC exit strategy
- What is the basic structure of a VC firm?
- How are the funds at VC firms allocated?
- Three types of Venture Capitalists: Domain expert, Network, Operator
- A domain expert is someone who’s deep into a certain field and knows everything going on in this industry. An operator, or a growth expert, is someone who has a track record of growing and scaling a company. A networker is someone who can make important intros to domain experts, operators, or your next investor.
- The management company receives the management fee from the fund (about 2%) and uses it to pay the overhead related to operating the venture firm
- Three investment Fund types: focus on stage, focus on geography, focus on sector
- How to generate returns: Share purchase, Acquisition, IPO
- 9 out of 10 VC backed companies do not exit
- Each fund is typically active for 3–4 years, but has a lifetime of ~10 years for harvesting returns.
- A large portion (sometimes ~50%) of a fund is reserved for follow-on investments to support existing portfolio companies.
Follow up links:
Why VCs push companies to liquify/exit