Venture Capitalist takes capital from their limited partners and buys equity in private companies in an attempt to generate profit for their limited partners. VCs are compensated by performance fees or by management fees. A venture capitalist receives 20 percent of the income from ‘performance’ or ‘incentive’ fee. This is often known as ‘carried interest’. VCs also collects management fees to pay office space, salary for partners and travel. Management fees are 1 percent of invested capital per years.
Most companies either fail or become ‘lifestyle companies’ that generates about 50 million a year in revenue and a few employees. Although they are too small to go public, they are very profitable. A VC must invest in firms that are likely to become publicly listed or force their portfolio companies to be acquired by a larger company.
Going public through and IPO or undergoing acquisition by another company is known as an ‘exit’ in VC lingo. It marks the point where the company’s investors ‘cash out’ by selling their equity in the company to other investors.
VCs generate the highest profits from investing in companies that need large amounts of capital and multiple financing rounds.