Venture Capital Funds

See: Venture Capital. See: Venture Capitalist.

So...VC funds are the darling lottery ticket of the wealthy, for the most part. Most quality funds come with investment minimums of a million bucks. A typical fund is $500 million-ish. And fund administrators are happy to just have a few hundred investors to deal with, rather than thousands.

So how's it work? Well, initially, there is a call made, asking for investor money to kick off the fund. If a Limited Partner has committed $1 million, and 15% is called for the fund's inception, then the LP writes a check for $150,000 to the General Partners of the fund, who take 2% a year off the bat for management fees. That money then starts to get invested in promising startups. And little by little, the million bucks is drawn down from LPs until the fund is "done."

Most funds last about a decade. After a few years, hopefully, funds start to realize gains and then distribute back to LPs the winnings, usually after taking their 20-30% cut of profits. The LPs receive the gains in cash if a cash purchase was made (i.e. MSFT bought a young startup that has awesome cell phone security for $100 million in cash, and the fund owned 12% of it, so the fund books a $12 million cash gain). Or the funds are distributed out in shares.

If LPs get shares in return for their investment, then those shares are not taxable as gains until the LP sells those shares and turn them into cash. Some funds return many multiples of their original inception value...but 3x the fund, or $1.5 billion in 10 years, in this case, is considered a "good score," even though (relative to the S&P 500) it's not all that great in most periods, given the amount of risk taken.

But some funds return 20x, 30x, 50x...hence the lottery ticket vibe, and the renaming of it being a venture fund to just being...venture "fun."