A percentage of the profits the firm makes. Carry is the Holy Grail of venture capital. Typically, the general partners receive a combined 20 percent of the profit from investing. For instance, if a firm receives $100 million in capital for its fund, and over 10 years returns $400 million, the profit was $300 million. The investors, or limited partners, receive 80 percent or $240 million, and the general partners split 20 percent or $60 million among themselves.
Closing: After the due diligence is done, and the VC finally decides to invest in the company, there is a legal closing of the deal. Involving lawyers and large contracts, the process can take one to four weeks.
Co-investment: A common program through which employees can invest their own money alongside the firm in some or all of the portfolio companies. If a firm is successful, the upside to this program can far exceed the salary and bonuses.
Closing bonus: A bonus often given to lower-level employees for sourcing or doing due diligence on deals that are done. This is intended to focus their attention on the best deals and work hard to get them closed.
Crater: A company that received venture capital and subsequently went bankrupt.
Dog: A company that received venture capital but is failing or going nowhere. "You can combine a dog with another dog, but you're still going to have a dog."
Due diligence: The process of investigating a company before investing in it. It typically includes calling references, calling customers, investigating competitors, validating legal contracts, visiting remote locations, coordinating with other investors, interviewing the entire management team, testing the technology, building spreadsheets and running sensitivity analyses on the projections to see if they make sense, etc.
Entrepreneur-in-residence: see Venture Partner.
Exit: This is an event, or series of events, that allows a VC firm to turn the equity it owns in a company back into cash. That event is usually a sale of the company to a larger company, or an IPO that permits the firm to sell its shares. Typically, the VC cannot exit at the time of an IPO because they are "locked up" by the investment banks executing the IPO [see "lock up"]
Fund: The pool of money a venture capital firm raises to invest. The money is typically committed by the limited partners for a period of 10 years. The money does not sit in a bank account for 10 years. In practice, the money is "drawn down" by the general partners as they need it for investments they are pursuing. Thus, most of the money stays with the limited partners, earning whatever rate of return they can achieve, until it is transferred to the VC for investment within a few weeks.
General partner: A partner in a VC firm. The person making the investment decisions and sitting on the boards of portfolio companies.
IPO: Initial Public Offering. Also known as "going public." When a company first issues equity shares for purchase by the public on one of the public exchanges.
IRR: Internal Rate of Return. A calculation that determines the rate of return on a portfolio investment or on the total venture fund. If, for example, you put your money in a bank account that gives you 5.5 percent interest annually, you could say your IRR on that investment would be roughly 5.5 percent (not accounting for taxes or service fees). IRR is the most important measure of performance for a VC fund. Limited partner:
An investor in a VC fund. Typically pension funds, endowments, wealthy individuals, and strategic investors such as large corporations which want access to the young companies in the VC's portfolio.Limited partnership:
The legal structure of many venture capital firms. It protects the investors in the fund from legal responsibility for things the fund managers might do. It also protects the partners by interference by investors for the duration of the fund, typically 10 years.
Lock-up: In an IPO, the venture capital firm is "locked-up" for a period of three to 18 months by the investment banks executing the public offering. The VC firm is not allowed to sell shares on the public market.
The reason for the lock-up? The market might see the VC selling shares as a negative signal. The job of the investment bank is to manage an orderly process that won't spook the market and have an adverse effect on the share price. Banks therefore get VCs to agree to a reasonable lock-up period.
Management fee: The general partners take a percentage of the fund every year to pay for expenses. Typically, a firm will charge the fund 2.5 percent. This pays for salaries, office space, travel, computers, phones, advertising, and legal expenses.