How venture capital works

A venture capital fund is a pool of other people's money, locked up for about a decade, that buys minority stakes in private companies that might become enormous. The fund's plumbing is why a partner pushes growth over profit, needs ~15% ownership, and shrugs at an $80M exit that would change a founder's life.

Concept

Limited partners (LPs) put up almost all the capital and have limited liability. General partners (GPs) manage the fund, pick companies, and sit on boards. In speech, "GP" also means the partners at the firm.

Read the pieces in order. Each one is why the next behavior exists.

Step	Concept	What it answers
1	Fund structure	Who puts money in, who decides, and how long the clock runs?
2	2 and 20	How do fees and carry split a $100M fund?
3	Return metrics	What do LPs actually need, and what do TVPI and DPI mean?
4	Reserves and ownership	Why lead funds want 10–20% and keep powder for winners?

The power law is the strategy that falls out of this math: a few companies must return the fund. Valuation fights are ownership fights dressed as prices.

Types of investors

"VC" is not one animal.

Multi-stage firms — seed through growth; huge funds; brand and later-stage capital.
Seed funds / micro-VCs — smaller books (a $20–100M class is common talk); live on early ownership and access.
Solo GPs — one decision-maker; fast; capacity limits.
Corporate VCs (CVCs) — strategic capital; distribution help, or slow process and conflicts.
Growth / late-stage funds — large checks into companies with revenue; closer to private equity on diligence.

As of 2025–2026, the same brand may run many overlapping funds. Your term sheet is with a specific fund entity. Ask which one.

What this means for founders and employees

VCs are agents of LPs. The mandate is: concentrate bets that can return a fund, harvest within a decade-ish window, and report metrics that win the next fundraise.

That produces predictable behavior: large markets, growth into the next round, willingness to lose the whole check, and limited excitement about a clean $40–80M acquisition.

Trade-off

Taking VC money buys speed and a network. The cost is a partner whose success criteria may diverge from yours. If your honest upside is a durable $10M/year profit business, alternatives to venture usually fit better.

As an engineer evaluating an offer, ask: What is the lead's fund size? What stage are we at? What ownership do they advertise? A $40M seed fund and a $2B multi-stage firm behave differently on pace, follow-on support and patience.

Common mistakes

Treating a $100M fund as $100M into startups. Fees eat a slice; reserves sit idle until winners appear.
Reading TVPI as cash. Paper marks are not pensions paid.
Expecting a partner to celebrate your $50M sale. Check ownership at exit against fund size first.

Key takeaways

LPs provide money. GPs pick companies. The partnership lasts ~10 years.
2 and 20 funds the firm with fees and pays partners for outsized exits.
LPs often want roughly ~3× net, which means well over 3× gross after fees and carry.
Ownership targets and reserves exist so winners can return the fund.