How Venture Capital Works

**YOU ARE NOT YOUR VENTURE CAPITALISTS CUSTOMER** I'm going to explain how a venture capital firm works and why, as a founder, you are not their customer. This may sound counterintuitive, but if you take cash from a venture capitalist, you are not their customer; their Limited Partners (LPs) are. You are simply an investment that must perform to continue receiving support from the venture capitalist. Most venture capitalists don’t actually have any money, especially those you see posting on TT. They raise funds from LPs, which can include endowments (like Harvard), pension funds, family offices, and ultra-high net worth individuals. Essentially, anyone with a significant amount of cash can participate. When they raise capital from LPs, the VC gets to take a sliver of the overall fund in the form of a management fee. For example, if a VC raises a $100 million fund, they might charge a 2% management fee, which gives them $2 million annually to cover office space, salaries, and other operational costs. While this might seem like a lot, the reality of managing a fund, sourcing investments, performing diligence, and supporting startups can make that money stretch thin. Additionally, the VC earns what is called "carry," which is generally 20% of the returns from their investments. This can be lucrative if their bets pay off, but it usually takes years for investments to yield returns through sales or IPOs. Success here means a higher chance of LPs investing in their next fund, allowing the VC firm to continue operating. Conversely, a series of poor investments might lead them to close shop. Because of this structure, as a startup, you are not the VC's customer, and they are not beholden to you or your company. If your startup falters, the investor can choose to stop funding or even remove you. It's critical for founders to understand this dynamic so they can set realistic expectations for the relationship. Comment and follow if you have questions on fundraising, venture capital, or becoming a founder. #founderadvice #fundraising #startup #startupadvice #startuptips #VentureCapital #vc