Fundraising — Where Venture Capital Investment Money Comes From

By Nicole Gravagna, Peter K. Adams

The capital in venture capital comes from wealthy individuals, pension funds, insurance companies, family offices, foundations, and other pools of cash. These entities are looking for higher returns than they can get in the stock market, but they still want to minimize risk.

To do so, they look closely at the track record of the venture capitalist in order to pick the funds that are most likely to provide a great return.

The people and organizations that provide the capital are called limited partners, because they have limited liability when they participate in the fund. They can lose their money, but they are not at fault if something illegal happens within the venture fund itself or any company that the VC invests in because their participation is limited to investing and not managing the fund.

The venture capitalist has to gather up the total value of the fund, which often exceeds $100 million. VCs do this through a process called selling the fund.

Basically, they have to convince investors to participate, and to do so, they perform many of the same tasks you’ll perform when you seek venture capital yourself: creating a private placement memorandum, putting together a pitch deck, writing up an executive summary, and pitching over and over to potential investors.

Selling a fund is a hard job, and it can take a year or more to collect enough money to close the fund. After the fund is closed, no more limited partners can participate, and no one is allowed to put more money in.

VCs and their investors enter into a limited partnership agreement, which stipulates things like the kind of company the fund will invest in, the amount of money that will be invested, the phase of development of the company, and the amount of time before the money is to be returned to the limited partners.