How a Venture Capital Fund Works
Venture capital funds are entities that exist to manage large amounts of money, put that money in growing companies, and then monitor the companies to protect the investment until what is hopefully a lucrative exit, when the company is at its peak value.
A VC firm is a business in itself that manages a fund which is also an entity within itself. A VC firm can manage more than one fund, either sequentially or simultaneously. In conversation, the words are used interchangeably.
Although a limited partner may care which fund his money went into (different terms in each fund perhaps), the entrepreneur cares more about which firm she’s working with. The entrepreneur’s terms will be dictated by the general partners managing the funds, not by the initial terms of the fund. From the entrepreneur’s standpoint, the fund that is investing in her is not relevant. The people she works with in the firm are.
The lifecycle of a venture capital fund has four parts.
Fundraising: The VC meets with potential limited partners to get them to invest their money in her fund.
Investing: The VC meets with many companies to find the few that she will invest in.
Managing: After the fund invests in a company, the VC actively participates on the board of the company, works with the CEO, and makes business connections to make sure that the company is making good business decisions.
Harvesting: When companies undergo liquidity events such as an initial public offering, merger, acquisition, or a sale of shares to another firm, the VC manages the divvying of funds to all the shareholders.