Venture capital is a structured asset class in which a General Partner (GP) raises a fund from Limited Partners (LPs) — typically institutional investors like university endowments, sovereign wealth funds, and family offices — and deploys that capital into early to growth-stage private companies. The GP charges an annual management fee (typically 2% of committed capital) and a carried interest (typically 20% of profits above a hurdle rate). The LP-GP relationship is governed by a limited partnership agreement (LPA) and typically runs for 10 years.
The VC model is structurally oriented toward power law returns: most investments will return zero or near-zero, a few will return modestly, and one or two exceptional outcomes will generate the majority of the fund's return. This means VCs are not looking for companies that will be "nice businesses" — they are looking for companies that could return the entire fund multiple times over. A $100M fund needs at least one company to return $300M+ to reach a 3x fund multiple. This shapes every investment decision.
For founders, understanding the VC model is essential for fundraising strategy. A VC who has $5M left to deploy from a $60M fund with a 7-year-old portfolio has very different incentives from one deploying from a freshly closed $150M fund. The stage, fund size, and portfolio concentration of potential investors determine whether their economic interests align with yours at exit.