Venture Capital funds flow from investors (called Limited Partners) to the VC firm, then in most cases almost immediately to the startup they invest in. Money moves out from LPs, through the fund, into startups, and the value it creates flows back along the same path. Here is the whole journey, one diagram at a time.
In one line
In a venture fund, LPs commit capital, the fund calls it and invests in startups, those startups create value, and proceeds flow back through the fund to the LPs, with the GP taking a share of the profit.
The diagrams below follow a single dollar of capital on its round trip, from the moment an LP commits it to the moment a distribution comes back. Each step is a piece of the same cycle, so the picture builds as you scroll.
Flow 01
The flow of VC Funds
Money flows out from LPs through the fund into startups, and the value it creates flows back along the same path in reverse.
Flow 02
LPs commit capital
LPs commit capital to the fund. Three linked entities sit behind it: the fund that holds the investments, the GP that controls it, and the management company that runs operations.
Flow 03
Capital calls draw it down over time
Rather than taking all the money up front, the fund draws committed capital from LPs in a series of capital calls over the years it is investing. Although the fund's assets under management can sometimes seem large, for the most part the bank account of the fund sits mainly empty, save for when capital flows in from LPs to be invested and immediately out into a company. When there is a liquidity event, capital flows back in, then is quickly distributed to LPs.
Flow 04
The fund invests in startups
The fund deploys called capital into portfolio companies through priced rounds, SAFEs, and notes, and receives equity and securities in return.
Flow 05
The fund pays the management fee
The fund also pays an annual management fee to the management company, which employs the team. This is a recurring flow, separate from the capital that goes to startups.
Flow 06
The startup creates value
Inside a portfolio company, the capital funds hiring, product, and customers, and enterprise value rises over time. This is the stage where the return is actually created.
Flow 07
An exit converts equity into proceeds
When a company is acquired or goes public, the fund's equity converts into proceeds, either cash or marketable shares.
Flow 08
Proceeds return to the fund
When a company exits, the proceeds, in cash or marketable shares, flow back into the fund, which now holds realized value rather than a private stake.
Flow 09
The distribution waterfall
Proceeds are split in a set order: LPs receive their capital back and any preferred return first, and the GP earns its carried interest near the bottom, once investors are made whole.
Flow 10
The full cycle, and it repeats
The whole journey is one loop: LPs commit, the fund invests, startups build value and exit, proceeds return, and the fund distributes to LPs with carry to the GP, before the cycle repeats for the next fund.
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