Glossary · Ecosystem and support · Updated
Venture capital is equity investment into young, private, high-growth companies. A VC fund raises money from institutional investors, deploys it across twenty to thirty holdings, and has to return it to them multiplied within roughly ten years.
Understanding a VC starts with understanding who they answer to. A fund does not invest its own money: it invests money belonging to its limited partners: insurers, pension funds, family offices, public institutions. It promised them a multiple over a set period, and that promise drives every decision it makes.
The structural consequence is this: a fund needs any single holding to be capable of returning the entire fund on its own. That is why a VC can decline a healthy, profitable, well-run company that will top out at €20M of revenue. The rejection is not about company quality, it is about incompatibility with the fund's model.
Funds earn money two ways. Annual management fees, around 2% of the amount raised, which pay the team. And carried interest, typically 20% of gains once capital has been returned to limited partners. That is where the real money is, and it is what aligns funds with very large exits rather than decent ones.
Example: the economics of a €100M fund
A mid-sized European venture fund, across its full life.
| Fund size | €100,000,000 |
|---|---|
| Fund life | 10 years, extendable by 2 |
| Management fee | 2%/year, roughly €20M over the life |
| Capital actually invested | ≈ €80,000,000 |
| Number of holdings | 25 to 35 |
| Initial cheque | €1M to €3M |
| Follow-on reserves | ≈ 50% of the fund, for later rounds |
| Carried interest | 20% of gains above the €100M returned |
| Target gross return | 3x, or €300M |
Returning €300M from 30 holdings means one or two of them must return €100M or more. That is why a VC's first question is about market size, before your product.
The common mistake
Raising venture capital for a business that does not need it. A fund imposes a growth trajectory and an exit horizon. A company that could be profitable at €5M of revenue gives up its freedom of choice without gaining much in return.
Frequently asked questions
How does a venture capital fund work?+
It raises money from institutional investors, invests it over about ten years into twenty to thirty startups, supports those holdings, then returns capital and gains to its limited partners on exit. It earns annual management fees plus a share of the gains called carried interest.
Why would a VC decline a profitable company?+
Because the model relies on a few very large exits, not steady returns. A company that will top out at a €20M valuation cannot repay a €100M fund even if it executes perfectly. The rejection is about fit with the model, not about the quality of the business.
Sources
Related terms
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