How venture works
VC fund structure
LPs commit, GPs decide, the management company runs the firm, and a 10-year clock shapes every investment.
A US venture fund is usually a limited partnership with three entities around it. Understanding who does what explains why capital arrives in slices, why partners race the clock, and why "Fund IV at $500M" is a promise, not a vault.
Concept
Limited partners (LPs) commit almost all the capital and have limited liability: they can lose what they committed, but creditors generally cannot chase their other assets for fund debts. General partners (GPs) control the fund and make investment decisions.
The big idea
Think of a closed-end club. Members pledge a maximum. The manager calls money when a deal closes. After about a decade the club is supposed to wind down and send cash home. The analogy breaks because the "club" cannot easily sell its holdings on a public market — exits are M&A or IPOs.
| Entity | Typical form | Job | Paid how |
|---|---|---|---|
| The fund | Delaware limited partnership | Holds LP commitments and portfolio shares | Investment gains |
| General partner | LLC controlled by the partners | Controls the fund, votes the shares | Carried interest |
| Management company | Operating company of the firm | Employs people, pays rent and software | Management fee |
LPs are institutions and wealthy individuals: endowments, pensions, foundations, sovereign wealth funds, funds-of-funds, family offices. They do not pick startups. The GP calls capital when it needs cash for an investment or fees — so a $100M "fund" is a $100M commitment, not $100M in a bank on day one.
Walking through the clock
A standard fund has a 10-year life, often with one or two one-year extensions. Roughly the first 3–5 years are the investment period (new deals). The rest is harvest: follow-ons, board work, and exits.
The limited partnership agreement (LPA) is the contract between LPs and the GP. Clauses you will feel even if you never read one:
- Commitment vs contribution. LPs promise a maximum; the GP calls in slices. An LP that fails to fund a call faces harsh remedies.
- Investment period. After it ends, the fund generally cannot make new platform investments; it can follow on and harvest. Partners racing to deploy before the window closes is a real failure mode.
- Recycling. Some LPAs let the fund reinvest returned capital or fee amounts under limits, which can raise buying power.
- Key-person. If named partners leave, LPs may suspend new investments.
- GP commitment. Partners usually invest their own money alongside LPs (often on the order of 1–3% of the fund).
A fund raised in 2019 that still holds illiquid 2021-vintage SaaS companies in 2029 is under pressure from LPs who want distributions, not paper marks. When a firm announces "Fund IV at $500M," deployment will take years. Your Series A wire comes from a capital call.
Common mistakes
- Imagining the fund as a pile of cash. It is a commitment plus a call schedule.
- Ignoring the 10-year clock. Late illiquid holdings create GP pressure that shows up in boardrooms.
- Assuming the brand is the legal investor. The term sheet is with a specific fund entity.
Check yourself
A firm announces a $100M fund. Is $100M sitting in a bank on day one?
No. LPs have committed $100M. The GP calls slices when deals close or fees are due.
Why does the investment period matter to a founder raising in year 6 of a fund?
The fund may be unable to make new platform investments and will be biased toward follow-ons and harvest.
Key takeaways
- Three entities: fund, GP, management company — money, control, and operations are split.
- A $100M fund is a $100M commitment, called over time.
- About 10 years, with new deals concentrated in the first 3–5.
Further learning
Next, 2 and 20 — how fees and carry actually split that capital.
Related
How venture capital works
LPs, GPs, fund structure, management fees, carry and the returns VCs need.
2 and 20
The classic VC fee split: about 2% a year to run the firm, 20% of profits as carry if the fund works.
The power law
Why a few investments return the whole fund, and how that shapes what VCs fund.