Venture Capital 101: How a VC fund works

A General Partner (GP) raises a fund (say $100 million) which is usually a 10 year partnership between a group of Limited Partners (LP). This limited partnership of typically involves about 10 investors.

All the investing is made in new high risk ventures over the first five year period during which time the GP draws down the funds promised by the LPs ($100 million) at the rate of $2 million/year

The second five year period is the harvest time (although there might be some follow-on investing made during this time as well).

The ventures need to execute the 'exit' part of the strategy and the GP starts returning funds to the LPs.

The GP charges a management fee of typically 2%/year of the total for the first 5 years.

This management fee declines at a linear rate to zero over the second 5 year period (or a percentage of the assets is the consideration if those assets haven't been sold yet).

If the fund has doubled in value as a result of all of the exits (ie. $200 million), the LPs get all of their principle back plus all of the management fees.

Of the remaining $100 million, the LPs get 80% and the GP gets 20%.

See more at: http://www.mycapital.com/VenetureCapital101_MyCapital.pdf