Venture capital is an investment strategy in which investors (called venture capitalists) collect outside capital and combine it with their own money to invest in early-stage companies, often in the technology industry. VC investments typically involve the firm purchasing a minority stake in the startup with the hope it will realize a return years later through an IPO, corporate acquisition, buyout, or other exit event.
This video gives an overview of venture capital funds as part of Carta’s free VC 101 curriculum.
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What is a venture capital firm?
VC general partners (GPs) set up VC firms to fund startups and other private companies with high growth potential. These GPs pool money from high-net-worth individuals, endowments, pension funds, and other institutional investors to make a series of investments through a fund that is exempt from SEC registration.
What is a venture capital fund?
Venture capital funds are investment vehicles in which VC firms pool funds from limited partners (LPs) and deploy that capital into “venture-backed” portfolio companies. A VC firm may be structured with multiple funds that it has raised over its history.
How venture capital firms make money
There are two primary ways venture capital firms earn money: carried interest and management fees.
This video gives an overview of the venture capital industry as part of Carta’s free VC 101 curriculum.
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Carried interest:This is a share of profits paid to a fund’s GPs, as laid out in the limited partnership agreement (LPA). Typically, VC fund managers receive 20% of their fund’s profits after they hit the hurdle rate–the amount that goes back to LPs–described in the LPA. Carry is usually paid out in two ways–the European waterfall structure or the American waterfall structure.
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A management fee:This is the fee that GPs charge their own investors (LPs) to manage their money. Often, GPs will wait until they are ready to make an investment before making a capital call, or they will conduct capital calls on a regular schedule based on their planned investment cadence. Doing capital calls over a period of time instead of up-front helps with fund performance metrics, like internal rate of return (IRR). Management fees typically go toward overhead like paying the GP’s base salary, travel costs associated with pitch meetings, and rent for office space.
Different types of venture capital firms
VC firms vary in investment size, industry focus, and more. But for our purposes, let’s look at how they are segmented based on investment stages.
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Seed and pre-seed VCs: These VC firms invest in startups that have recently launched, typically in the company’s first round of external funding. These investments may take longer than others to realize a return, and the individual investments are much smaller than later-stage VC deals.
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Early-stage VCs: VC firms that are early-stage focus on making deals at the Series A or Series B rounds. These deals are larger than pre-seed or seed deals, and the companies involved are often closer to realizing an exit, so the wait for a return on investment (ROI) is typically shorter.
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Growth-stage VCs:Growth-stage VCs invest in startups at the Series C, Series D, or Series E stages and beyond. These deals are for mature private companies that are still growing revenue at a rapid rate but that have outlined a clear path to profitability. Growth-stage VC deals require the highest amounts of investment capital per deal, and that money typically goes toward startups that are close to an IPO, acquisition, or another type of exit.
How VC compares to other investment strategies
VC is often confused with other investment strategies like private equity. Venture capitalists are also confused with other types of investors.
Venture capital vs. angel investing
The most common type of investor in startups is a VC, but angel investors, or simply “angels,” are another way for early-stage startups to get funding. Unlike VCs who invest money on behalf of LPs, angels are often high-net-worth individuals who invest their own money on their own behalf. Institutional VC funds also tend to write larger checks than angel investors.
Venture capital vs. private equity
Venture capital is a form of private equity, but private equity is not a form of venture capital.
Both VC and PE investment strategies collect money from LPs and invest it over a long period of time, often up to 10 years. But there are several differences between private equity, which can also refer to leveraged buyout or growth investing strategies, and venture capital.
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Venture capital |
Private equity | |
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Type of investment |
Minority stake |
Majority stake |
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Investment size |
Seven- and eight-figure deals (though they can be bigger) |
From eight figures to $10B+ |
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Debt use |
Not a key part of investment strategy |
Uses large amounts of borrowed money |
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Stage of company |
Invests in startups from Seed Series to Series A and beyond |
Invests in growth-stage companies, public companies, and other mature businesses |
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Industry focus |
Majority of deals in tech |
Invests in every industry |
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Management style |
Focused on long-term growth |
Focused on becoming more efficient, profitable |
Venture capital vs. accelerators
An accelerator is a startup program that provides founders with close guidance, mentorship, and some funding in exchange for an equity stake in their company. Accelerators are sometimes focused on early-stage startups that have yet to raise their first formal fundraising round. Among other benefits, accelerators are instrumental in helping founders launch their companies, make connections, and learn how to pitch VC investors. Some accelerators may have dedicated funds for investing in the companies that go through their programs, but not all do.
