I recently had the opportunity to invest in a venture capital fund. In this post, I want to explain how these funds work and what I’ve learned from the experience so far.

Disclaimer: The information in this post is based on my limited experience and personal research over the last few months. Please consult a true expert before investing, and also let me know if anything here is wrong so I can correct it.

Intro to venture capital

Venture capital (VC) is a common form of private market financing for tech startups. Nearly every major, big-name tech company founded in the last 30 years, including Google, Facebook, and Amazon, got VC money when it was smaller.

The VC space is populated by a number of large and very famous firms including Sequoia and Andreessen Horowitz. But, the barriers to entry aren’t that huge, so there’s also a long tail of less well-known firms, even going down to small, mom-and-pop shops like the one that I invested with (more on that later).

These firms, in turn, manage one or more funds. The funds are what investors actually invest in, not the firms. By analogy to more traditional investments, the firms are the equivalent of Vanguard or Fidelity, and the funds are things like Vanguard’s Total Stock Market Index Fund (VTSAX).

As a VC investor, the funds are what you’re primarily interacting with, so let’s dig more into how those work.

All about funds

More formally, a venture capital fund is the legal entity that collects investor money, writes checks to startups in exchange for equity (ownership) stakes, and distributes the profits (minus any expenses and fees) back to the investors when these companies are acquired or go public.

A large VC firm might have dozens of funds active at any given time. Sequoia, for instance, has ones like the Sequoia Capital China Growth Fund V and Sequoia Capital U.S. Growth Partners Fund VIII. Note that fund names are often suffixed in Roman numerals- we’ll talk about why in a bit.

Just as with more traditional mutual funds, VC funds typically have a specialization that drives the investment choices- these can include specific product sectors, company stages, or geographies.

Unlike mutual funds, however, VC funds have a number of interesting quirks that make them somewhat exotic and complex from the investor perspective. I describe these more in the sections below.

Quirk 1: Fixed time frame

The first weird thing about venture capital funds is that they usually have a fixed time frame. Unlike a mutual fund that lives on for decades and has thousands of investors buying and selling shares each day, traditional venture capital funds are very restricted on when money comes in and when it gets paid out.

First, the fund gets commitments from investors. Once the target amount is raised, it’s closed to new investors; the fund managers then spend the next few years talking to startups, signing deals, and deploying the investors’ money. At a certain point, new investments stop and the fund is focused primarily on helping its portfolio companies grow and achieve some sort of liquidity event like an acquisition or an IPO. When the latter happens, the fund’s equity stake is sold and the proceeds are distributed back to the investors.

After a fixed time period, traditionally ten years, the fund is dissolved, and any remaining assets are liquidated and distributed.

Because of this rigid lifecycle, investors are necessarily locked in for the entire fund term. You can’t sell your stake and get out after five years, for instance, because you’ve changed your mind or need the money for something else.

Another side effect of these fixed-term fund schedules is that if a VC firm wants to be continuously collecting investor money and investing in companies, it needs to be continuously creating new funds. So, a firm will create a “US Growth Fund I”, then, a year or two later a “US Growth Fund II”, and so forth. If a firm has a long streak of successful investments, the Roman numeral suffixes can get quite big.

Quirk 2: Investor restrictions

Another big difference with traditional investments is that not everyone is eligible to invest in a VC fund. First, you generally need to be an accredited investor. In the US specifically, that means you need either an income of at least $200k per year or a net worth of at least $1M.

Even if you have a lot of money, though, it might not be enough. Large funds often have minimum investment thresholds in the millions of dollars, putting them out of reach to everyone but the super rich or institutional investors like pension funds.

And, there are yet more barriers- even if you’re super rich, you still have to convince the funds to take your money. They could refuse because they already have more than they can deploy or their legal structures (below) might restrict the total number of investors.

Quirk 3: Solicitation restrictions

Most VC funds are legally forbidden from doing “general solicitation” of investors. This is why if you go to the website of a firm like Sequoia, there’s no big, red “Open an account now” button, or even any basic information about contacting them to learn more about investing. Likewise, no matter how wealthy you are, you won’t get unsolicited emails or mailings about VC fund opportunities.

The fund managers can only solicit you if there’s a “pre-existing” relationship, e.g. you’re a friend or former work colleague. So, most opportunities are hidden unless you’re connected to someone in the VC community.

That being said, there are a few VC funds or fund-like entities that are allowed to do limited general solicitation. So, even if you don’t have connections, there are still some opportunities available. AngelList is a well-known place for finding these, and there a few other, publicly accessible VC investment marketplaces as well.

Quirk 4: Partnership structure

Yet another weird feature of VC funds is that they’re usually structured as partnerships, not corporations.

When you make a commitment to invest, you become a “limited partner” (LP) in the fund. The “limited” prefix means that you own a percentage of the fund / partnership, but you don’t have control over the specific investments.

The investment decisions and general day-to-day management of the fund are handled by a second, higher tier of “general partners” (GPs). These people (or an entity representing them) have typically invested money as well. Being a GP is a lot more work than being an LP, but it’s potentially a lot more lucrative because of the fees collected (see below).

So why are VC funds structured as limited partnerships? From what I can tell, it’s a combination of factors- these entities provide the ideal combination of lax regulatory oversight, low administrative overhead, and tax benefits. On the last item in particular, one nice thing about partnerships is that the profits are passed through directly to the partners; there’s no taxation of the funds themselves.

Quirk 5: Fee structure

Finally, VC funds have much higher fees than traditional investments. A typical fee structure is the so called “two and twenty” rule- 2% per year of the total amount you’ve committed, plus 20% of any profits. The former is meant to cover the fund’s operating expenses whereas the latter (also called “carried interest” or simply “the carry”) is paid to the fund’s managers / general partners as a performance-based bonus.

Thus, the fund needs to have pretty solid returns for investors to get their money back. And, if the fund happens to get lucky and invest in the next Google or Facebook, the general partners will be raking in a massive amount of money off the other investors’ profits.

Why invest?

Given all of the limitations, complexities, and expenses described above, why would anyone want to invest in these funds? The simple answer is that they provide a way to get “ground floor” access to early stage, high-growth companies in the tech space. These investment opportunities aren’t available in public markets, and historically have had pretty good returns.

Of course, many of these early stage companies will fail, so there’s a lot of risk involved too. But, the idea is that a venture capital fund, like a mutual fund, spreads out the risk across a diverse set of investments. In the VC case, because successful tech companies can become super valuable, it only takes a tiny number of “winners” in the fund to guarantee a good return for investors.

The process so far

Now that we’ve discussed how VC funds work and why to invest, I’d like to describe how I came upon my VC investment opportunity and what the experience has been like so far.

Step 1: Solicitation

Late last year, I got an email from some friends from college that I hadn’t been in touch with for a very long time. They were starting a venture capital fund and were wondering if I was possibly interested in investing. I replied with something along the lines of “tell me more”, and we went on from there.

Step 2: The pitch

The next step was to hear their pitch. I met with them on Zoom, and they gave me a short presentation on their investment thesis (putting money into early stage companies run by experienced founders) and the basic terms of the fund (fees, lifespan, etc.).

Because their fund was really small and because most of their investors were VC novices like me, they spent a lot of time explaining how venture capital works and what I should expect if I were to join, which was helpful.

They also made the risks very clear and said (rightfully) that I shouldn’t invest anything that I couldn’t afford to lose.

Step 3: Signing the paperwork

After hearing the pitch and thinking about it for a while, I decided to put a small amount of money in. I told my friends (i.e., the general partners) the amount, and they sent over a 60 page legal contract with the full terms of my investment and the partnership. I signed and then officially became a limited partner!

No money was due at the time of signing. Instead, as is typical in venture capital, the terms of the fund stipulated that the general partners would make “capital calls” in the future to collect money from investors as needed.

Step 4: First capital call

A few weeks after signing, my friends sent out the first “capital call”, requesting that the limited partners send them the first 15% of what they had committed. I mailed a check to their house, and they sent me an email a few days later acknowledging that they had gotten it.

Step 5: First investments

Over the next few weeks, I started getting regular investor updates, including details on the first couple of companies that the fund was investing in.

Step 6: Tax time

In March of this year, I got a K-1 form that had been prepared by the fund’s accounting firm. This form included the name of the fund, the amount of my investment, and the total gains and losses for my share of the partnership in 2021 (all zeros because nothing interesting had happened yet).

I then entered the numbers into TurboTax, and filed my taxes as normal. I had been a bit worried about the extra overhead here, but overall it was no worse than dealing with the 1099 forms from my traditional investments.

Step 7: Repeat (and profit?)

Over the next nine and a half years, I expect the cycle of capital calls, investment updates, and tax forms to continue. In a few years, I’ll hopefully start to see some returns as the companies in the fund’s portfolio experience liquidity events.

Given the relatively modest amount I’ve invested, I don’t expect to make huge amounts of money. But, it would be cool if at least one of the companies my money is funnelled to becomes successful and well-known before the fund ends.


Overall, it’s been a lot of fun learning about the venture capital world and becoming a small VC investor myself. If you’re interested in early-stage tech companies and are feeling bored by the public markets, it might be worth looking into VC as a way to add some excitement to your financial life and some diversity to your portfolio.