What a venture capitalist is
A venture capitalist, or VC, is a professional investor who puts money into young private companies with the potential to grow very large, in exchange for a share of ownership. The money is not the VC's own: it comes from a fund raised from institutional and private investors.
Venture capital is a bet on outliers. A typical fund expects most of its investments to return little or nothing and a handful to return many times the money. That shapes everything a VC does, including which companies they will fund and why.
What a venture capitalist does
- Sourcing. Meeting founders, reading decks, following markets and building a network that brings good companies to them first.
- Screening and diligence. Deciding which companies deserve a closer look, then examining the team, market, product, numbers and legal details.
- Investing. Negotiating the valuation and terms, usually through a term sheet, and leading or joining a funding round.
- Supporting. Helping portfolio companies hire, sell, plan and raise their next round, often from a board seat.
- Fundraising. Raising the next fund from investors, which depends on the performance of the last one.
How a venture capital firm is structured
A venture firm manages one or more funds, each usually set up as a limited partnership with a life of about ten years.
- General partners (GPs) run the fund, make the investment decisions and carry the legal responsibility.
- Limited partners (LPs) provide most of the money: pension funds, endowments, foundations, insurance companies, family offices and wealthy individuals.
- The investment team below the partners typically includes principals, associates and analysts who source and evaluate deals.
The fund invests over its first three to five years, then spends the rest of its life supporting companies and waiting for exits through acquisitions or public listings.
How venture capitalists make money
Venture capitalists are paid in two ways, often summarised as "two and twenty":
- Management fee: typically around two percent of the fund's committed capital each year. It pays salaries, offices and the cost of running the fund.
- Carried interest: typically around twenty percent of the fund's profits, paid only after the limited partners have received their money back, and sometimes a minimum return on top.
Carried interest is where most of a successful VC's earnings come from, and it arrives years after the investments are made. That is why VCs look for companies that could return the entire fund on their own: without those outcomes, there is little carry to share.
What venture capitalists look for
- A large market, big enough for one company to become very valuable.
- A team with a credible reason to win in that market.
- Evidence that customers want the product: revenue, growth, retention, pilots.
- A reason it is happening now: a technology, regulation or behaviour that has changed.
- A path to a large exit within the fund's life.
Venture capitalists vs angel investors
Angels invest their own money, usually at the earliest stage and in smaller amounts, and answer to no one but themselves. VCs invest other people's money in larger rounds, follow a fund strategy, and report to their limited partners. Many startups raise from angels first and from VCs once there is evidence of traction.
What this means for founders
Because of how they are paid, VCs need to believe your company could become very large. A good pitch deck makes that case in a few minutes: the market, the evidence, the team and the plan. See how venture funding works, VC pitch deck design and the standard pitch deck structure.