A sum of money pooled by venture capitalists to be invested in startups and early-stage companies. While venture capitalists can certainly invest in fledgling businesses on their own, a venture capital fund allows them to do so without needing to be involved in all decisions. With most VC funds, one investor manages the fund and serves as general partner, while all other investors serve as limited partners.
Although only the general partner makes investment decisions, all partners in the fund decide on the criteria necessary for investing in a given company. These could include how strong the company’s management team is, the uniqueness of a company’s services or products and how much growth potential it has.
While not strictly necessary, venture capital funds are often focused on a single industry or economic sector such as energy or healthcare innovations.
Each fund has a limited life (usually about 10 years), which can be extended if the fund is doing well and investors agree to extend it. When the venture capital fund is retired, the general partner takes a share of net profits as well as a fee for his or her work. Then, the remaining profits are split among the limited partners.
A group of wealthy investors in their mid-40s each kept having the same problem. When they invested alone, they ended up funding startups focused on the nostalgia of their youth. After many failed investments related to early video game systems and pet rocks, they decided to band together and form a venture capital fund. Importantly, they chose a general partner who could make smart investment decisions because, unlike the rest of them, he was not currently grappling with a mid-life crisis.