Defining “Venture Capital”

On February 19, 2013 by Alexander
There are two major uses of the term “venture capital”:

  1. An subset of the financial industry involving investments in small, high-growth potential companies. These investments are high-risk, high-reward and typically lock an investor into a multi-year holding period. Usage: “My friend went into venture capital.”
  2. Money received by a small, high-growth potential company. Usage: “We just raised venture capital and can now afford to buy new computers.”

A venture fund is a legally-defined entity that constitutes a partnership between general partners (the people who actively invest money in small companies) and limited partners (large institutional investors that give the fund its money).

A venture fund has terms and conditions that define the partnership, including how the general partners get paid, how the limited partners get paid, how the money in the fund will be invested, how much money will be in the fund, the process for resolving disputes between general partners and limited partners, the fund duration and lots of other details.

A venture capital firm may have several funds. Each fund is a separate legal entity under the firm’s management.

As a reporter writing about venture capital, I learned about the difference between firms and funds first hand. I reported a firm was going out of business, when, in fact, one of its funds was being dissolved. Big difference and the general partners working for the firm were not happy with what I’d written. I immediately posted a correction and swore not to make the same mistake again!

Check out my book for more on the venture capital industry.

Leave a Reply