How a fund actually works

The two kinds of partner

A venture fund is a limited partnership. The general partner runs it and carries the legal responsibility. The limited partners provide almost all of the money and, in exchange for limited liability, give up control over individual investment decisions. You are trusting the GP’s judgment. That is the deal, and it is why choosing the GP is the only decision an LP really makes.

The GP usually invests personally alongside LPs. The size of that commitment tells you a lot about alignment. One to two percent of the fund is common; more is a good sign.

The three documents

You will encounter three documents, and they do different jobs:

1. The private placement memorandum, or PPM, describes the fund, its strategy, its terms and, at length, its risks. Read the risk section. It is boilerplate until it is not.
2. The limited partnership agreement, or LPA, is the contract. It sets fees, carry, the fund’s life, what the GP may and may not do, and how disputes are handled. This is the one to have a lawyer read.
3. The subscription agreement is where you commit a specific amount, confirm you are eligible, and provide the information the fund needs for its own compliance.

Some funds also publish a short deck or a one-page summary of terms. Those are helpful, but they are not the contract.

The life of a fund

A typical fund runs for ten years, with the option to extend by a year or two if companies need more time. The life divides into two parts:

• The investment period, usually the first three to four years, when the GP makes new investments and calls most of the capital.
• The harvest period, the remaining years, when the GP supports existing companies, makes follow-on investments from reserves, and returns money as companies are sold or go public.

You cannot withdraw during this time. Secondary sales of LP interests exist but are rare for small funds and usually at a discount. Assume your commitment is locked for the full life.

What the GP actually does all day

Finding companies, meeting founders, deciding, negotiating, then helping: hiring, introductions, the next round of funding, the hard conversations. A good GP also writes to LPs regularly and honestly. Quarterly letters that explain what happened and what the GP got wrong are worth more than polished ones that never admit a mistake.

Before you move on

Which document would you send to a lawyer? What happens in year six of a fund? What does the GP’s personal commitment tell you?