This page is for startup founders to understand their potential VC investors.
If you have the time, read these.
Entrepreneur (French) ≈ adventurer ≈ venture ≈ enterprise ≈ company.
Capital = money.
So, "venture capital" is just a fancy name for "company money".
In the 1400s-1800s, companies of entrepreneurs would borrow money from adventure investors, get a large boat, employ sailors, and take long sailing trips to far distant places. When they got back they might have large loads of gold, silk, and spices worth a lot of money. The employee sailors, entrepreneurs, and the investors would all get fairly rich from the enterprise. However, there was a large chance that the boat would return with very little valuable product or sink in a storm with all of the investment lost. Even if the boat returned, it would take a long time to cash out whatever returned. Because of the high risk of total loss and the long period of time to cash out the investment, those adventure investors deserved a large share of the returns that the boat brought back for the enterprise.
Some things to know
The difference between an angel investor and VC is that
An angel investor invests their own money
A VC invests money from a fund that is 1% their money and 99% the money of even wealthier people and institutions.
VC firms have different roles.
Limited Partners (LPs). Despite the name, limited partners have the least limits. They provide almost all of the money that the VC firm invests. Everybody else is working in service of the LPs. There are usually 10 to 100 LPs in a fund.
Managing Partner has the final word on decisions like the CEO of a company. There is only one.
General Partners (GP). The Managing Partner is a general partner. There can be multiple GPs but rarely more than a few. GPs have some of their own money in the fund and participates in the investment committee voting about whether to make each investment. They also receive carried interest payments from the fund's success.
Partners, Venture Partners, and Principals have senior roles evaluating and recommending deals for the firm to invest in.
In decreasing order of authority: Associates, Analysts, Interns, and Scouts find, research, and analyze deals
Entrepreneur in Residence (EIR) has domain specific expertise and advises and occasionally joins companies that the firm invests in
Most VCs interact mainly with the CEOs of startup companies. Raising money and negotiating business terms is the CEO's responsibility. As a CEO, you need to get the attention of a GP for an investment deal to happen.
Just as startups raise money from VCs, GPs raise money from LPs.
Who are these LPs? These are some examples:
Sovereign wealth funds who invest the savings of a country's government
Pension funds of state or local governments or large companies
Endowments of universities and other institutions who receive donations
Family offices that invest the savings of one or more wealthy families
High net worth individuals
What do LPs want from venture funds?
There are two general truths about investing.
Investments with greater risk provide greater returns over the long term
Investments that cannot be cashed out (are "illiquid") for a long time produce greater returns on average
LPs usually have a very large amount of money that they want to have last forever and grow steadily. They will invest most of their portfolio in relatively safe investments such as US treasury bonds, real estate, precious metals, and the public stock market. But, to get slightly better average returns, they will invest a small portion of their portfolio in high risk high return investments such as VC.
So, dear entrepreneur, of a hypothetical $100B endowments, $1B gets invested in 100 VC funds as $10M each. Each fund gathers 10 such LPs for a $100M fund, out of which comes the $1M that a VC invests in your risky enterprise. Go forth and seek as much gold, silk, and spices as you can and return quickly.