Hello, everyone. Today, we're going to be talking about venture capital firms and how
venture capital works. Basically, the idea of, really, venture capital firms are the
ones that are investing in startups. For the most part, in early-stage startups, you see
them starting to invest at seed rounds, then they go to Series A, Series B, Series C, and
then you start having private equity firms really coming in.
The main difference between the venture capital firms and the private equity firms is that
the venture capital firms are investing in people, while private equity firms are investing
in the numbers. When it comes to the actual venture capital firm, everything starts with
the people, all the way at the bottom. So the people at the bottom really are the analysts.
So those are the kind of people that are going to be crunching the numbers in the office,
that are going to go to events, that are going to be cold emailing founders.
And by the way, if you receive a cold email from an analyst, don't even respond because
basically what's happening is that what the analyst is doing is reaching out to get information
from the market, specifically from the founders, so they're able to then retrieve all that
information, all that data, and identify different players in the market and potentially, the
winner that the investment firm is going to be investing in. That's going to start with
the analyst.
The analysts don't have any type of say or vote in the matter. They're just crunching
numbers and pushing paper. After the analysts, what you're going to encounter are the associates.
The associates, they start with the summer associates, for example, the people that are
doing an MBA, and for the summer they want to work at a venture firm, and potentially
become later on a fulltime associate. Then you have the associates, again, people
that are just coming out of college or coming out of their MBA, or maybe like a failed entrepreneur
that has been given the opportunity by that fund that invested in them to come and work
for them. Basically, the associates, they're going to be scouting deals, they're going
to also go to events, and they are going to have the potential of opening the door for
you to the partners, which ultimately are the ones making the decisions. However, the
associates don't have any say in the matter, and they're not going to be able to make any
type of investment decision. So do not waste your time so much with the associates.
The other guys that are going to be in-between the associates and the partners are going
to be the principles. Now, the principles are those folks that may have a say in the
matter, are those individuals that are seasoned, that have been working in venture capital
for some time, or maybe they have exited a business in the past. Now, they're working
at the firm, and they're helping with sourcing investments, with doing the due diligence
on some of those investments, and then potentially have the opportunity to make decisions on
some of those investments. But for the most part, principles do not have that much of
a say when it comes to making the investment.
Outside of the principle, what you're going to find is the partners. Now, the partners
come in different types of flavors. The first one is going to be the normal partner. That
partner is basically that one that is going to be receiving that deal flow, that is going
to be involved in the socializing, into the screening, into the due diligence, and also
into the term sheet process as well as the verification of whatever statements that have
been made by the founder, which really is the due diligence, again, even though the
due diligence really happens all across the board from the minute that you step your foot
in the firm. The VC is going to start to really do the due diligence on you.
Basically, with that being said, the partner really is going to be someone at the beginning
is going to be grabbing you—if they like you, they're going to be grabbing you into
the firm, putting you in touch with, let's say like another partner so that they are
already becoming your sponsor. They are helping you with introducing you to other partners
so that potentially other partners are also easing to the idea of making an investment
in you. Then, basically, the partners, they're going to invite you for the partners' meeting.
And then, at that point, they're going to decide whether or not they make an investment
in your business.
The top partner is the managing partner. The managing partner, for the most part, is the
real head guy. He's also super-involved when it comes to the operations in the business
and also that managing partner is going to be involved when it comes to raising money
for their fund, and their fund is obviously raising money from their own investors, which
the venture capitals call the limited partners or LPs.
Now, it's very important for you to understand how the venture capital firms make money.
Basically, what it comes down to is that they make a 2% management fee, on average, and
a 20% carried interest. So there's always a management fee on whatever assets that they're
managing over the course of time let's say five or ten years. And also, they get the
carried interest, and the carried interest, the way that it works, let's say 20% is on
whatever profit that they're able to generate for their own funds.
Let's take an example. For example, if they've raised a 100-million-dollar fund, and let's
say they've been able to do okay or they've been doing very well with the fund, and they
made up to 200 million between the amount raised and then also the profits that they
generated from the startups that they were able to exit, then basically what happens
is that the first 100 million is returned to their investors, to their limited partners.
And then from that remaining 100 million that they have made in profits, what's going to
happen is that they're going to be taking the carried interest.
In a case where they're making 20% carried interest on that extra 100-million on the
profits, they will be taking 20 million themselves. The other 80 million is what they return back
to their investors. They will be making money with that carried interest. Plus, let's say
if it's a 100-million-dollar fund, if they're making, let's say, a 2% management fee, that's
going to be on a yearly basis, 2% on that, and that is distributed amongst the partners
of the firm. That, in a sense, is the way that venture
capital firms work, and the way that you're going to be seeing the structure of all these
different players. Again, remember that the limited partners, which are the ones that
invest in the actual fund, those do not have a say in the matter. Sometimes, they may sit
on the investment committees that some of these venture firms have, but for the most
part, the people that are making the decisions are the partners. That's really the way that
venture capital works. If you like this video, please feel free to
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