Legal set up and key parties of a venture capital fund.
Venture Capital Funds invest and manage provided capital to generate high exit returns. A venture capital fund consists of the general partners and the limited partners. The general partners invest the capital, provided by the limited partners, and manage the fund’s portfolio. The portfolio companies are chosen based on different criteria must allow for a high return on investment via one of the different available exit strategies.
If you want to learn more about venture capital financing, you should read our comprehensive guide on this topic: Venture capital funding: A beginners guide
Overall structure
General Partners (GPs)
The GPs found and manage the VC fund. This includes raising the capital for the fund and investing it into startups, as well as managing the investment portfolio (See also: Lifecycle eines VC Fund).
Role
General Partners are responsible for the establishment and management of the fund. They make the final investment decisions and lead the fund operationally.
Responsibilities
The GPs are responsible for the overall performance of the fund. Their main responsibilities are fundraising, ensuring quality and execution of deals as well as LP reporting.
Incentives
The GPs earn money via different channels. The main earnings are generated via a management fee paid by the LPs and by retaining a stake of the exit proceeds (Carried Interest”).
Limited Partners (LPs)
Different institutions make up the LPs that invest capital into the VC fund to finance the investments in the startups. For this, the LPs expect a high return.
Role
Investors in VC funds can be public or private institutions, or wealthy individuals. Limited partners contribute the dominate stake of the raised capital.
Responsibilities
The contribution of the LPs is solely monetary, as they only invest capital into the fund. Besides that, the LPs may give investment advice or vote on a certain investment.
Incentives
The only source of return for the LPs is the proceeds from the startup-exits. In return, the LPs expect a high return from the GPs (~ 25% p.a.).
Portfolio Companies
Portfolio companies of a VC fund are selected startups, that must fulfill certain business and valuation criteria to be of interest for the VC fund.
To be a potential portfolio company of a VC fund, startups must fulfill the three criteria shown on the right.
In case of an exit , the valuation of every startup must provide the potential to exceed the total fund volume.
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