Fund Mechanics Beginner

Venture Capital (VC)

Professional investment firms that fund high-growth startups in exchange for equity.

Definition

Venture capital is a form of private equity financing where professional investment firms (VC firms) invest in high-growth startups in exchange for equity. VCs raise funds from limited partners (pension funds, endowments, wealthy individuals), invest that capital over 3-5 years, and aim to return 3x or more to their LPs over a 10-12 year fund life. VCs typically invest in specific stages (seed, Series A, growth) and add value through board seats, introductions, and strategic advice.

Why it matters

Your company's VC investors influence its trajectory, governance, and exit timeline. The VC model requires large exits, which means VCs push for aggressive growth and significant outcomes. This shapes the risks and potential rewards of your equity.

Example

Sequoia Capital raises a $1B fund from LPs. It invests $10-30M per company across 30-40 startups. If one company returns $500M and a few others return $100M+ each, the fund returns 3x+ to LPs. The other companies may return little or nothing.

Related terms

Private Equity (PE)
Investment firms that buy established companies, often using debt, to improve and resell them.
Limited Partner (LP)
An investor who provides capital to a VC fund but has no management role.
General Partner (GP)
The managing partner(s) of a VC fund who make investment decisions and manage the portfolio.
Carried Interest (Carry)
The GP's share of fund profits, typically 20%, which is their primary compensation incentive.
Management Fees
The annual fee (typically 2% of fund size) VCs charge LPs to cover operating costs.
Fund Vintage
The year a venture capital fund started investing, used to compare performance across time periods.

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This definition is an educational summary. It is not legal, tax, or investment advice. Specific terms in your equity grant or company documents may differ.