In order to know what VCs are looking for, it is important to know how VC funds work: their structure, how VCs get paid and whose money they are managing. This can shed light on what their goals are and on why they look for certain types of investments.
- How helpful? Scale of 1 to 5
VC investors, VC quarterly reports, VC performance measures, VC compensation
- Relevant questions addressed
How are VCs structured?
How does money flow inside a VC?
Who do VCs need to satisfy?
Who do VCs report to?
- Summary bullet points
- Fund structure
- General partners (i.e. the fund managers, GPs) are in charge of strategy and investment decisions while limited partners (LPs) are the investors in the fund
- There are several entities comprising the VC firm
- The G.P. fund (or funds) entities are usually Delaware corps
- The L.P. fund (or funds) is what LPs and the G.P. fund invest in and what holds portfolios, usually also a Delaware corps like its portfolio companies
- The GPs can create their own L.P. fund to avoid charging themselves management fees. In this case the funds for LPs and GPs are parallel and form a “fund family”
- Fund Management usually constitutes an LLC where the VCs physically operate. It employs GPs and other employees to manage the fund
- VCs can create a series of other side funds and investment vehicles structures, depending on tax, legal or other specific investment needs. They work as the main fund does.
- Fund management compensation
- Fund managers are compensated through management fees
- And by splitting the carried interest (a percentage of the fund’s profits) among the team members
- The LPs usually ask that the GPs and fund management are contributing capital to the fund as well to assure the managers will act in the investors’ best interests
- Fund performance is evaluated through the use of multiples, rate of returns, and comparison to other funds. These methods usually measure how much money is flowing to investors.
- VCs have reporting obligations towards their investors that they tend to satisfy quarterly
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