VC firms, or Venture Capital firms, invest money into startups with high growth potential. When startups use these investments wisely, their businesses are transformed and taken to new heights. Startups like Facebook, AirBnB, Uber and Canva have all raised funds from VC firms to fuel their explosive growth.
So, for a startup founder looking to raise funds, it is crucial to know how VC firms operate. Specifically, they should know whom to network with and the various ranks of employees/partners in a VC firm who will screen the startup before it is finalized for funding.
The positions available in a VC firm depend on its size and structure. If we were to look at the entire spectrum of positions, it would include the following:
Analysts– These are entry-level employees who have completed a Bachelor’s degree. They look out for investable startups, cold call them and schedule appointments of founders with more senior members of the VC firm. They analyze financial statements and business plans of investable companies. They regularly research the ongoing trends and innovations in industries in which the VC firm invests.
Associates– Similar to Analysts, Associates must have at least a Bachelor’s degree. They are promoted to this post after 2-3 years of being an Analyst. They are mainly responsible for conducting due diligence. VC firms conduct three types of due diligence on investable startups-initial screen, and financial and legal due diligence.
Associates assist with deal execution once startups are selected for funding, and maintain liaison with portfolio companies. They attend numerous events and workshops where startup founders can network with them. Subsequently, Associates present the most suitable startups to senior members of the organization.
Principal/ Venture Principle – Principals are senior members of the VC firm. They are experienced in working with startups, and are usually promoted from the position of Associate from the same firm or a different firm.
Although they cannot make investment decisions, they identify potential investee companies through referrals, help partners in the VC firm to evaluate those companies and determine appropriate fund sizes for the shortlisted ones. They also help negotiate the terms of investments and facilitate exits. In general, they handle investments related to a particular industry.
Principals are on track to become partners in future, subject to the gains made from deals sourced by them. That is why they are also called “Partners in training”. Generally, they have a seat on the boards of portfolio startups and are eligible to earn carry (a share of profit from investment).
General Partners (GPs)- GPs raise funds from external investors, which the VC firm invests into startups. They are also the ones who take final decision on whether or not to invest in a company.
They choose whom to take on as new partners, as well as the terms of those partnerships. They receive a share of management fees and carry. To learn more about these, see this.
Apart from them, there are also Limited Partners (LPs) who contribute around 98% of the money in VC firms’ funds. However, they are external to the firm, meaning they are not part of the VC firm itself, and General Partners have to raise funds from these external investors before investing in startups. The VC firm has a limited partnership with these Limited Partners, wherein the General Partners assume unlimited liability and the Limited Partners assume limited liability for investments.
Find out more about VC firms and fundraising from the following articles.