This video explains the hierarchy and roles within a venture capital firm, from analysts to partners, and how they interact with founders during the fundraising process. It highlights the importance of understanding who to engage with at each stage and discusses how VC firms source deals and evaluate potential investments.
What this video covers
Everything starts with the people, all the way at the bottom, the analysts. Those are the people that are going to be crunching the numbers, going to events, and that are cold emailing founders.
If you receive a cold email from an analyst, don't respond. The analyst is reaching out to get information from the market, specifically from the founders, so they're able to retrieve that information, data, and identify different players in the market and the winner that the investment firm will invest in.
Then you have the associates, people that are coming out of college or their MBA, or a failed entrepreneur that is given an opportunity by that fund that invested in them to come and work for them. Associates will be scouting deals, go to events, and have the potential of opening the door for you to the partners, which are the ones making the decisions. However, the associates don't have any say.
The other guys between the associates and partners are the principals, which are those that may have a say in the matter, are seasoned, have been working in venture capital for some time, or have exited a business in the past. Now, they're working at the firm and helping with sourcing investments, doing the due diligence, and then have the opportunity to make decisions.
Then, the normal partner: the one receiving the deal flow, involved in socializing, screening, due diligence, and the term sheet process and verification statements that have been made by the founder, which is the due diligence.
The partner is someone who, if they like you, will grab you into the firm, putting you in touch with another partner. They're already becoming your sponsor, helping introduce you to other partners so that other partners are easing to the idea of making an investment in you. Then the partners will invite you to the partners' meeting. At that point, they will decide whether or not they make an investment in your business.
The top partner is the managing partner, which is the head guy. He's super-involved in the operations in the business and also involved in raising money for their fund, and their fund is raising money from their own investors, which the venture capitals call the limited partners, LPs.
It's very important for you to understand how the venture capital firms make money. They make 2% management fee, on average, and a 20% carried interest. There's always a management fee on whatever assets they're managing, let's say five or ten years. Also, they get the carried interest, let's say 20% on the profit they generate for their own funds.
For example, if they've raised a 100-million-dollar fund, and they've done very well with the fund and made up to 200 million between the amount raised and also the profits they generated from the startups they exited, then the first 100 million is returned to their investors, to their limited partners. From that remaining 100 million that they have made in profits, they will be taking the carried interest.
In a case where they're making 20% carried interest on that 100-million on the profits, they will be taking 20 million themselves. The other 80 million is what they return back to their investors. They will be making money with that carried interest. If it's a 100-million-dollar fund, they're making 2% management fee, that's going to be on a yearly basis, and that's distributed among the partners of the firm.
That is the way that venture capital firms work, and the way that you're going to be seeing the structure of all these different players. Remember, the limited partners, the ones that invest in the actual fund do not have a say in the matter. Sometimes, they may sit on the investment committees that some of these venture firms have, but the people making the decisions are the partners. That is the way that venture capital works.
