How VC works | What's a venture capital fund, and how does it work | VC 101
Summary
TLDRIn this educational video, Rita, the head of the Venture Capital business development team at Cardano and a lecturer at UC Berkeley School of Law, introduces the basics of venture capital (VC) funds. She explains that a VC fund is a legal entity pooling money from third-party investors, or limited partners (LPs), to invest in assets with the expectation of profit. The video clarifies the distinction between a VC fund and a VC firm, highlighting that the latter is the management company overseeing the fund. Rita also discusses the legal structure of VC funds, typically formed as limited partnerships with a general partner (GP) entity to manage the fund, ensuring legal separation and liability limitation for each fund.
Takeaways
- 📚 A venture capital (VC) fund is a legal entity that pools money to invest in assets and then sells them for profit.
- 🏢 The VC firm, or management company, is distinct from the VC fund and is responsible for managing the fund's operations.
- 🔍 The term 'VC firm' often refers to the brand name of a venture capital management company, not the fund itself.
- 🤝 A successful VC firm may operate multiple funds simultaneously, each with its own focus and strategy.
- 💼 The money in a VC fund comes from third-party investors who expect the fund's investments to generate a profit.
- 👥 Investors in a VC fund are known as limited partners (LPs), who contribute capital to the fund in exchange for a share of the profits.
- 📜 VC funds are typically structured as limited partnerships, with the investors being the limited partners and a general partner (GP) managing the fund.
- 👤 The GP is not usually an individual but a separate legal entity set up by the VC firm to manage the fund's investments.
- 🏛 Each fund is managed by a unique GP to ensure legal separation and limit liabilities to that specific fund entity.
- 🔒 Legal separation of funds is crucial to protect the VC firm and other funds from liabilities associated with any single fund.
- 🚀 The script promises to delve deeper into the venture capital industry and its workings in the next lesson.
Q & A
What is the basic definition of a venture capital fund?
-A venture capital fund is a legal entity that pools money to invest in assets, with the fund owning those assets until they are sold.
How does a venture capital fund differ from a venture capital firm?
-A venture capital fund is a pooled investment vehicle, while a venture capital firm is the management company that operates the fund, employing analysts, renting office space, and subscribing to financial publications.
What is the role of the VC firm in relation to a VC fund?
-The VC firm is responsible for managing the VC fund, which includes making investment decisions and overseeing the fund's operations.
Who are the typical sources of money for a VC fund?
-The money for a VC fund comes from third-party investors who contribute capital with the expectation of generating a profit from the fund's investments.
What is the legal structure of a typical VC fund?
-A typical VC fund is structured as a limited partnership, with investors becoming limited partners (LPs) and a separate legal entity known as the general partner (GP) managing the fund.
Why are VC funds often formed as limited partnerships?
-Limited partnerships are used to clearly define the roles and responsibilities of the investors (LPs) and the managers (GP), and to limit the liability of the investors to their investment in the fund.
What is the difference between a general partner (GP) and a limited partner (LP) in a VC fund?
-The general partner (GP) is the legal entity that manages the fund, while limited partners (LPs) are the investors who contribute capital to the fund but have limited control and liability.
Why does a VC firm typically set up a new GP for each fund they manage?
-Setting up a new GP for each fund helps legally separate the funds from each other, limiting the liabilities of each fund to its own GP entity and protecting the firm and other funds from potential legal issues.
What is the significance of the term 'limited liability' in the context of a VC fund?
-Limited liability means that the investors' (LPs) financial responsibility is limited to the amount they have invested in the fund, protecting their personal assets from the fund's debts or legal issues.
How does the script suggest one should approach learning about venture capital as an industry?
-The script suggests starting with the basics, such as understanding what a VC fund is, how it differs from a VC firm, and the legal structure of a VC fund, before diving deeper into the industry's operations.
What is the role of the Rita, as mentioned in the script?
-Rita is the head of the Venture Capital business development team at Carda and also teaches Venture Capital funds at UC Berkeley School of Law, indicating she is an expert in the field and the instructor for the lesson.
Outlines
📚 Introduction to Venture Capital Funds
Rita, the head of the Venture Capital business development team at Cardano and a lecturer at UC Berkeley School of Law, introduces the concept of venture capital (VC) funds. She explains that a VC fund is a legal entity pooling money to invest in assets, which it later sells. The difference between a VC firm, which is the management company, and a VC fund is clarified. A VC firm may operate multiple funds, and each fund is a limited partnership with third-party investors known as limited partners (LPs). The fund is managed by a general partner (GP), which is a separate legal entity set up by the VC firm. The importance of the legal structure is emphasized, with the GP managing the fund and LPs contributing capital with the expectation of profit.
🏛 Legal Separation and Liability of VC Funds
The script continues with a discussion on the legal separation of each VC fund from the others, facilitated by the establishment of a unique GP for each fund. This separation is crucial for limiting the liabilities of a fund to its own GP entity, thereby protecting the VC firm and its other funds from legal repercussions. The concept of venture capital itself will be explored further in the next lesson, with an invitation to continue learning by clicking a button, indicating a structured educational approach to understanding the venture capital industry.
Mindmap
Keywords
💡Venture Capital Fund
💡Venture Capital Firm
💡Legal Entity
💡Limited Partnership
💡Limited Partners (LPs)
💡General Partner (GP)
💡Liability
💡Investment
💡Profit
💡Asset
💡Business Development
Highlights
A venture capital (VC) fund is a legal entity that pools money to invest in assets.
A VC fund differs from a VC firm; the fund is an investment vehicle, while the firm is the management company.
A VC firm may operate several different funds simultaneously, each with its own focus and investors.
The money in a VC fund comes from third-party investors who expect a profit from the fund's investments.
A VC fund is typically structured as a limited partnership, with investors becoming limited partners (LPs).
The general partner (GP) is a separate legal entity set up by the VC firm to manage the fund.
The GP's role is to manage the fund's investments and operations on behalf of the LPs.
Each fund is managed by a distinct GP to ensure legal separation and limit liabilities.
Legal separation of funds is crucial to protect the VC firm and its other funds from liabilities of a single fund.
The transcript introduces the basics of venture capital funds and their structure.
The speaker, Rita, is the head of the Venture Capital business development team at Carda and teaches at UC Berkeley School of Law.
The lesson aims to lay a foundation for understanding VC funds and their operation.
A fund is a collective investment scheme that simplifies the process of investing in various assets.
Investors contribute capital to the fund with the expectation of generating profits through the fund's investments.
The distinction between a VC fund and a VC firm is essential for understanding the venture capital ecosystem.
The legal structure of a VC fund, being a limited partnership, affects the roles and responsibilities of the investors and managers.
The concept of limited partners and general partners is fundamental to the functioning of a VC fund.
The transcript provides a clear explanation of the roles of LPs and GPs in a VC fund.
Transcripts
foreign
[Music]
there's a bunch of foundational details
about what funds are and how they work
that you're going to want to know from
the very beginning my name's Rita and
I'm the head of the Venture Capital
business development team here at carda
and I also teach Venture Capital funds
at UC Berkeley School of Law and in this
first lesson we're going to start laying
that foundation with some of the most
important Basics over the next few
minutes we'll talk about what a VC fund
actually is then we'll learn how a VC
fund differs from other types of funds
and we'll do a quick preview of the
structure that organizes how a VC fund
operates soda kick it off let's go ahead
and zoom right in on that first one what
exactly is a venture capital fund
we'll start with a simple definition a
fund is a legal entity that pools money
in order to invest in assets
the fund then owns those assets until it
sells them and that's it real basic fund
is just a little on Eddie that collects
a bunch of money to invest that money in
a bunch of stuff pretty easy right
longer Journey you're going to hear
people say different words like Venture
Capital fund inventor Capital firm and
it's important to know up front those
two things are not the same a VC fund is
different from a VC firm these two
entities work in tandem with each other
but they're not the same entity so
what's the difference well the VC firm
is the management company that rents
office space employs a bunch of analysts
subscribes to financial publications and
so on it's basically like when you hear
the brand name of a famous VC you're
talking about the management company or
the VC firm and here's the thing a
successful firm May operate several
different funds at one time like fun One
Fund two and so on making sense so far
okay so we touched on the fur now let's
go back to the fund we know what a fund
is right it's a pooled investment
vehicle but whose money is actually
getting put into that pool a fund's
money comes from third party investors
they put their money into the fund with
the expectation that the fund's
Investments are going to generate a
profit by the time the fund sells them
so and we're going to do this a lot
let's recap real quick you got two on
any so far the firm aka the management
company and the fund
the firm is the company that's it's over
the top and the fund is legal entity
that pulls money from third-party
investors now looking again at that fund
drop your head around all this stuff
it's it's good to know what type of
legal entity the fund usually is a VC
fund is typically formed as legal entity
called a limited partnership and there's
a reason for that all these third-party
investors are going to join the fund and
contribute Capital to it right well when
they do that they're going to become
what we call limited partners of the fun
or LPS for short so if you ever hear
someone talk about the LPS of a fund
that's what they're talking about the
investors are limited partners
contributing to a limited partnership
make sense
okay so now let's add another layer to
it the fund is a limited partnership and
this limited partnership has to be
managed by someone not someone is called
a general partner or GP for short
now there's a common misconception when
people hear the word GP in general they
usually think it's referring to a person
like the person that's running the fund
but the GP typically isn't a person it's
a separate legal entity and that legal
entity is set up to manage the fund so
again let's recap you got the VC firm
that sits over the top
and the VC firm sets up a legal entity
called the general partner or GP this GP
is created to manage the fund and the
fund is limited partnership that pulls
together money from a bunch of investors
who are also known as limited partners
or LPS
it's worth noting sometimes when people
are being casual they may refer to the
investors that are managing the fund as
the GPS of that fund that's just kind of
a casual language thing we'll talk about
it a little later what's important for
you to know right now is the legal
structure of all this stuff so when you
hear GP just remember the GP is the
legal entity that manages the fund
still making sense
okay let's keep going typically VC firms
are going to set up a new totally
separate GP for each one of their funds
this basically helps legally separate
all the different funds from each other
this separation is actually pretty
important for one key Reason by lately
separating each fund you're limiting the
liabilities of that fund to one specific
place the GP entity
which Probably sounds like gibberish
right so let me break it down let's
pretend one of our funds gets saddled
with a bunch of legal liabilities
luckily for us that fund is legally
isolated from all the others meaning
those liabilities generally won't run up
the chain to impact the firm or any of
the firm's other funds the liability is
limited to just that GP entity right
there
let's now look back at our definition
and zoom in on two special words venture
capital
in the next lesson we're going to dive
into Venture Capital as an industry and
learn a little bit about how it works so
when you're ready click the button down
below and let's keep learning
foreign
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