How VC funds work
A venture capital fund raises money from limited partners — institutional investors like pension funds, endowments and family offices — and invests it in startups in exchange for equity. The fund has a fixed life (typically 10 years): it invests in years 1-5 and returns capital through exits (IPOs or acquisitions) in years 5-10. The VC firm earns a management fee (typically 2%) and carry (20% of profits above a hurdle rate).
The portfolio model
VC investing operates on a power law: VCs expect most of their investments to fail or return little, with the returns of the entire fund driven by one or two exceptional exits. This means VCs are specifically looking for companies capable of achieving very large valuations — only a company that could return 10-100x the investment is interesting to a VC.
What VCs look for
Four factors dominate VC investment decisions: market size (large enough to support a very large company), team (exceptional founders with relevant experience and resilience), traction (evidence that the product is working), and defensibility (some form of competitive moat — network effects, proprietary technology, switching costs).
Is VC right for you?
Most businesses should not seek VC. The VC model requires selling large amounts of equity, accepting significant loss of control, and committing to a high-growth, high-risk path optimised for exit. For most businesses — service companies, lifestyle businesses, conventional retail — bootstrapping, bank lending, revenue-based financing or small business grants are more appropriate.