💡 Intro to VC
VC Overview
Venture Capital (’VC’) is a form of equity capital targeting early-stage, high-growth potential companies in exchange for ownership stakes, seeking out a select few outsized returns.
- Unlike IB, consulting, or other sell-side services, VC is about making bets on people, products, and markets - often before the rest of the world sees their potential.
- Unlike PE, HFs, and other buy-side roles, VC inherently can’t rely on track record, pedigree, and numerical metrics in the same way - more focus on operational excellence and potential.
The Power Law
The ‘Power Law’ is the famous principle that makes VC math work; where a small number of investments generate such outsized returns that they can create returns for the entire fund.
- Consider Pareto Principle (’80/20’ Rule); majority of outputs come from minority of inputs.
- Start-ups are risky and a lot of them fail, even if they seem like good bets, so it’s important that the remainder not only survive but thrive - i.e. are major successes - to return the fund.
- i.e. can invest in 100 companies and have 99 of them fail completely (go to $0); but if that remaining 1 company is such a ‘moonshot’ that it returns 100x then your fund breaks even.
- So VCs aren’t interested in ~2-3x returns like PE; they make high-risk, high-potential bets that might go to $0, but have potential to return >20-30x to be considered ‘a success’.
- Legendary Examples
Structure of VC Funds
Similar to PE funds, VC funds are structured as a limited partnership:
- Limited Partners (LPs) → investors who contribute capital - typically pension funds, university endowments, insurance companies, family offices, and HNWIs. LPs are passive - don’t make investment decisions. Typically contribute ~99% of fund capital.
- General Partners (GPs) → the fund managers who source deals, make investment decisions, sit on boards, and support portfolio companies (’portcos’). They usually commit ~1% of fund capital and receive management fees + carried interest.
Revenue Model:
- Management Fees → typically ~2% of committed capital during the investment period, stepped down thereafter. Covers operating expenses (salaries, office, service providers) and is intended to fund operations - not generate profit.