What is Venture Capital?
Posted on 04. Nov, 2008 by squareroots in Basics
Let’s start with some definitions.
Definitions
Venture Capital: Investment into early stage companies by full-time professionals. The majority of the money invested is not their own (99% typically comes from Limited Partners).
Limited Partners: LPs are the money. Limited Partners are typically corporations (private pension plans), endowments, foundations, or state pension plans. Wealthy families also invest as LPs into, typically, smaller venture capital funds.
General Partners: These are the actual Venture Capitalists. In VC firms (management companies), you hear about the “partner track”. General Partners often put in 1% of the overall VC fund, with LPs accounting for 99% of the fund.
Venture Capital Fund: This is the separate legal entity where the money is placed (either from the beginning, or is available through capital calls as needed during the lifetime of the fund which is typically 10 years). These are typically Private Partnerships, which is the why you have “Partners” as they are the basis of the entity.
Details
Venture capitalists raise money from Limited Partners and invest that money into early stage companies. LPs are only passive investors and agree to pay a management fee (typically 2-2.5% per year for the duration of the fund) to the GPs to manage their investments. As Limited Partners include state pension plans and private pension plans, you may actually be a limited partner in a VC fund without even knowing it.
A VC firm may have multiple funds that have been raised and invested over a long period of time. When money is invested into early stage companies, they become portfolio companies.
External Links
National Venture Capital Association – NVCA – describes the basics very well if you want a more detailed description.
