How VC works | What's a venture capital fund, and how does it work | VC 101

Summary

In 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

00:00

📚 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.

05:00

🏛 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.

Keywords

💡Venture Capital Fund

A venture capital fund is a type of investment fund that pools money from third-party investors to finance startups and small companies with high growth potential. In the script, Rita explains that a fund is a legal entity that invests in assets and sells them for profit, emphasizing that a venture capital fund is distinct from a venture capital firm.

💡Venture Capital Firm

A venture capital firm is the management company that operates one or more venture capital funds. It is responsible for the day-to-day operations, including employing analysts and subscribing to financial publications. The script clarifies that while a firm may operate several funds, the firm itself is not the same as the funds it manages.

💡Legal Entity

A legal entity is an organization that is recognized by law to have rights and obligations. In the context of the video, the script describes how a venture capital fund is typically formed as a legal entity called a limited partnership, which allows it to pool money from investors and invest in assets.

💡Limited Partnership

A limited partnership is a legal structure where partners have limited liability based on their investment. In the script, Rita explains that a venture capital fund is usually formed as a limited partnership, with investors becoming limited partners (LPs) who contribute capital to the fund.

💡Limited Partners (LPs)

Limited partners are individuals or entities that invest in a limited partnership, such as a venture capital fund, with limited personal liability. The script mentions that LPs contribute capital to the fund with the expectation of generating a profit when the fund's investments are sold.

💡General Partner (GP)

A general partner is a legal entity responsible for managing the limited partnership, such as a venture capital fund. The script clarifies that the GP is not typically a person but a separate legal entity set up by the venture capital firm to manage the fund's investments and operations.

💡Liability

Liability refers to the legal responsibility for debts or obligations. In the script, Rita discusses the importance of separating each fund with its own GP to limit the liabilities to that specific GP entity, protecting the venture capital firm and its other funds from legal liabilities of one fund.

💡Investment

An investment is an asset or item acquired with the goal of generating income or appreciation. The script explains that the venture capital fund's money comes from third-party investors who expect the fund's investments to generate a profit.

💡Profit

Profit is the positive financial gain resulting from the sale of an asset or investment. The script mentions that the purpose of a venture capital fund's investments is to generate profit for the investors when the assets are sold.

💡Asset

An asset is any resource owned by an individual or entity with economic value. In the context of the video, assets refer to the investments made by the venture capital fund, which the fund owns until they are sold for a potential profit.

💡Business Development

Business development involves strategies and activities that help an organization grow and increase its market presence. Rita introduces herself as the head of the venture capital business development team, indicating her role in expanding the firm's investment activities and partnerships.

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

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[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

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