Welcome to our VC Education: Definitions & Understandings Centre! ?
Here you’ll find the education to understand everything you need to know on a beginning basis for the typical definitions and understandings of a venture capital firm and fund to help you make an informed decision that honors God.
What is a General Partner? ?
A GP is a manager of a venture fund. They may be a partner at a large VC firm like Sequoia, or an individual investor with a smaller firm. Like fund managers in other arenas (stocks, mutual funds, crypto, etc.), they analyze potential deals and make the final call on what to do with the money they manage.
GPs of venture funds generally have “skin in the game.” They invest their own money into their fund.
GPs also have a lot of responsibilities. Two main responsibilities are raising money from investors (called limited partners or “LPs”) and finding quality deals.
What is a Limited Partner? ?
LPs provide the capital for funds to invest. In return, they hope for profits and, in some cases, access to information and future deals.
Limited partners (“LPs”) are critical to the success of venture funds because they provide the capital that funds invest in deals.
- Limited partners (“LPs”) commit capital to a venture fund.
- LPs generally hold few obligations outside of funding their commitments.
- Depending on the fund, LPs might gain valuable exposure to startups in the fund’s portfolio.
- Understanding limited partner compensation and documents is key to building participation in a successful limited partnership.
Aside from sending in their money on time, LPs typically carry few other obligations. This arrangement stands in stark contrast to the many roles and responsibilities of a general partner (“GP”) who manages the venture fund.
What is a Venture Capital Fund? ?
Venture capital funds are pooled investment vehicles that provide capital to startups in exchange for equity.
Venture capital is a vital source of funding for high-growth startups across the globe and plays a disproportionately important role in spurring job creation and economic productivity.
Many of the world’s biggest companies (Alibaba, Alphabet, Apple, Amazon, Facebook, Microsoft, Tencent, and Tesla, etc.) started with funding and advice from venture capitalists (VCs). Venture-backed companies constitute nearly half of IPOs in the U.S.
Venture capitalists make risky investments in startups in the hopes of outsized returns—which is happening with greater frequency.
The industry has experienced substantial growth and innovation in the past decade. Today, more VCs than ever are investing more capital than ever.
A venture capital fund can now mean many things—from a traditional fund that invests in a portfolio of companies over a 10-year horizon, to a single-deal SPV, to a Rolling Fund that accepts quarterly commitments.
Venture capital funds are pooled investment vehicles that invest in startups in exchange for ownership in those companies. Venture capital is a type of private equity, which means investments are not made available on a public market.
Venture capital funds earn returns for investors in different ways. Most commonly, a fund will receive returns following a “liquidity event,” such as an initial public offering (IPO) or acquisition from another company. The proceeds will then be distributed among the fund’s investors on a pro rata basis.
The manager of a venture capital fund is called a “general partner” (GP). A GP is responsible for raising money from a network of investors, selecting investments, and overseeing all of the operational, accounting, and legal aspects of the fund. A GP often follows an investment thesis to select investments, targeting a specific segment of the market and/or stage of investment.
Investors in a venture capital fund are called “limited partners” (LPs). They’re often high-net-worth individuals or other financial institutions seeking exposure to the venture asset class.
Venture capital funds typically invest in a number of startups, expecting some to fail, while hoping for a handful of big winners. The typical time horizon for most venture investments is 6-10 years.
How do Venture Capital Funds Help Startups? ?
Venture capital plays an important role in a company’s success.
According to HBR, more than 80% of the money invested by venture capitalists goes into building infrastructure required to grow the business—in expense investments (manufacturing, marketing, and sales) and the balance sheet (providing fixed assets and working capital).
In addition to capital, many venture fund managers provide guidance to portfolio companies.
In fact, many VC firms build reputations for helping portfolio companies with recruitment, customer acquisition, access to follow-on funding, and advice on other challenges startups encounter.
How do Venture Capital Funds Make Money? ?
A venture capital fund invests in a company and then monitors the investment—potentially providing future financing in subsequent rounds—until the company experiences a “liquidity event” (e.g., an IPO or acquisition) that generates returns for investors.
VC returns follow a power law distribution, which means one homerun investment in a portfolio of many companies can generate outsized returns for the entire fund. Funds often invest in a number of companies expecting that some could fail and hoping that others will experience large exits that “make” the fund.
According to AngelList data, a venture-backed seed-stage startup has an estimated 1 in 40 shot—or 2.5% chance—of becoming a “unicorn” (company valued at over $1B) today.
Because venture capital funds invest in early-stage companies, these investments carry a high degree of risk. The high return potential for these investments help incentivize this risk taking.
What are the Different Stages of Venture Investment? ?
When a startup raises funding, the name of the fundraising round often implies the size/sophistication of the company. Common round names are:
- Pre-seed
- Seed
- Series A
- Series B
- Series C
- Series D
There’s no hard-and-fast rule for what qualifies as a “seed stage” or “Series D” company. A useful way to think about it is by looking at the average investment sizes for each round name.
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Source: AngelList.com