A High-Level Overview of How Venture Capital Funds Work

If you’re curious about how VC works, this post is for you.

Before you write a memo, join a fund, or build a public presence in the industry, it helps to understand how the engine runs: who puts up the capital, who manages it, how decisions are made, and how returns are earned.

This is a primer on the structure, economics, and strategy of a venture fund — made for builders, future VCs, and anyone trying to decode the game from the outside in.

Basic Structure

At its core, a venture fund is a Delaware limited partnership built around three main roles:

Limited Partners (LPs) – Provide the capital
General Partner (GP) – Makes investment decisions
Management Company – Runs day-to-day firm operations

This setup allows for efficient capital flow, limited liability, and tight governance.

Key Characteristics

Most funds last 10 years
LPs are passive – they don’t choose which startups to back
The GP has full decision-making power
Each fund is often part of a “family” (e.g., Fund I, II, III...)

Where the Money Comes From

LPs are often:

Institutional investors (pension funds, endowments)
Corporations
Family offices or high-net-worth individuals

Their goal? Long-term returns. Often with patient, multi-year timelines.

What the GP Actually Does

The General Partner contributes a small slice of capital (1–2%), takes full control of investment decisions, and receives a share of the upside (carried interest). GPs have fiduciary duties to LPs and manage risk, deal flow, and founder relationships.

Meanwhile, the management company earns revenue through fees and handles salaries, operations, communications, and back-office support.

VC Fund Economics

Management Fee

Typically 2–3% annually of committed capital
Covers salaries, expenses, and firm operations
Usually steps down over time (e.g., year 6–10)
Predictable and steady revenue stream for the firm

Carried Interest (Carry)

Usually 20–30% of profits after LPs are paid back
Structured either:
- European style – fund-level carry (more conservative)
- American style – deal-by-deal (more aggressive)
Subject to clawback provisions if early gains don’t hold

Capital Mechanics

Capital Commitment – What each LP agrees to invest
Capital Contribution – Actual funds deployed when the GP calls capital
Capital Calls – Triggered when a deal needs funding
Capital is usually called pro rata across all LPs
Funds often use short-term credit to bridge timing mismatches

The Investment Thesis

A solid fund starts with a clear thesis: your “why, where, what, when, and who.”

Think of it as a compass for sourcing, evaluating, and backing startups. Here’s what a strong thesis answers:

Why does this fund need to exist?
Where is it geographically focused?
What sectors, check sizes, or stages does it prioritize?
When in a startup’s lifecycle does it enter?
Who are the people behind it — and what edge do they have?

This is what helps LPs understand the fund’s direction — and what helps GPs stay aligned as they deploy capital.

Example Investment Theses

Arboretum Ventures
A healthcare-focused venture fund in Ann Arbor, Michigan, investing in capital-efficient companies that reduce healthcare costs while delivering great clinical care. Targets companies needing no more than $40–50M from syndicate partners before exit.

Silicon Valley Fund
A venture firm exclusively investing in early-stage enterprise companies, leveraging its focused approach to maintain a competitive edge.

Investment Process (At a Glance)

Source Deals – Build a pipeline aligned with the thesis
Valuation & Diligence – Evaluate upside, risk, and fit
Invest – Finalize terms and wire the capital
Support – Help portfolio companies grow
Exit – Seek acquisition, IPO, or secondaries
Fundraise Again – Replenish capital for future funds

Who I Am

If this kind of inside-out breakdown is helpful, I’ve got more coming.

I’m a writer, strategist, and DAO-native operator currently building my way into venture — without a pedigree, and all in public. You can learn more about my work, background, and what I’m building next at estmcmxci.eth.link.

What This All Means (and Where I’m Taking It)

Understanding the mechanics is one thing. Learning how to build credibility, judgment, and trust in public is another — and that’s what I’m exploring next.

In my next post, I’ll break down what Andrew Reed of Sequoia did in 2017 to stand out — and how anyone can replicate those moves today.

It’s called Modern Venture Is Permissionless — part essay, part playbook, part field report from my own experiment breaking into VC from the outside in.

Follow @estmcmxci to catch it when it drops.