Venture Capitalists invest in early stage start-ups when success is not assured. In exchange for investing funds to assist a company to grow, the VCs gets an ownership interest in the newly formed company. Since during the early stages a company is not worth much, the VC’s ownership interest is worth exactly what it gave. However, as the company develops and became valuable, the value of the capital invested grows as well.
Eventually, the company will either begin to trade shares through the public stock market or get sold to a bigger company (at a profit). In the either case, the VCs sell their shares they own, for more money than they originally paid for them.
Generally, many VCs raise the bulk of capital that they invest into start-ups from “Limited Partners”(LPs) such as pension funds, insurance companies and institutions such as a university. When the funds make money from a successful exists, the bulk of original investment is returned to the LPs. To put it clear, LP gets about 80% of profits while General Partner (GPs) who run the fund gets about 20%.