How VC Firms Work

An article we liked from Thought Leader Gigi Levy-Weiss of NFX:

To understand how VCs work, first you need to understand the typical firm’s structure.

Here are the highlights.  VC-Structure

  • VC firms are partnerships comprised of LPs and GPs.
  • LPs (Limited Partners) are investors in the fund who provide the majority of the fund’s capital but don’t actively take part in investments.
  • GPs (General Partners) are in charge of making investments for the whole fund. They usually contribute ~5% of the fund’s capital, so they also have skin in the game.

The diagram above shows the firm structure of a typical early-stage VC, with LPs contributing capital (top layer) to the fund managed by the GPs (middle layer) who deploy that capital to a portfolio of startups they invest in (bottom layer). The number of companies the fund will invest in depends on the fund’s size and the stage it invests in.

In addition to GPs and LPs, VCs typically have investment team members with other roles and titles. Some of the most common you’ll encounter are:

  • Managing Partners – Higher up than GPs in some firms, but they still mostly act like a general partner and can make investments like general partners. Usually, these will be the more senior partners, but any GP can usually lead investments.
  • Associates/Principals/VPs – Associates and Principals can be seen as a filter layer between you and the Partners, so having a direct partner intro is preferred. But if there’s no warm direct intro to partner, then Principals (in some funds) can be your champion and internal advocates if they believe in you.
  • Analysts – They do the research but don’t have any decision-making power. However, that doesn’t mean they don’t have any influence, so be nice! The analysis they present can often impact the partners’ decisions.

Understanding VC Math

To negotiate with investors you have to understand their financial incentives.

VCs charge investors (LPs) 2 – 2.5% annually on invested capital, called a management fee. This is what’s used to...

Read the rest of this article at nfx.com...

Thanks for this article excerpt and its graphics to Gigi Levy-Weiss, General Partner at NFX.

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