In explaining how VC funds work, I’ll illustrate a basic VC fund structure. A basic VC fund organizational structure have few entitles, for a different tax planning and business purposes. Venture capital funds are organized into following entities:
Venture Capital Fund
This is the main VC fund entity that invests in other companies. To raise funds, the General Partners (GPs) use an Offering Memorandum to convince the Limited Partners that they have the expertise or unique strategy in a given sector or sectors of the market.
These are the people who entrepreneurs deal with. In their prior life, they may have been entrepreneurs. This entity makes decisions for the fund and also gets the carried interest paid by the fund.
Limited companies include pension funds, foundations, educational endowments, wealthy individuals and insurance companies. If the general partners are successful they convince Limited partners to invest capital to achieve the size fund offered. After this happens, there is a first “close” of the fund.