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March 10, 2009


Carry: A percentage of the profits the firm makes. Carry is the Holy Grail of venture capital. Typically, the General Partners receive a combined 20% 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%, or $240 million, and the General Partners split 20%, 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: This is a common program where 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 is 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 that 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: This is 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.


Exit: This is an event, or series of events, where the venture capital firm is able 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 after an IPO when the VC can 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 ten years. The money does not sit in a bank account for ten 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." This is when a company first issues equity shares for purchase by the public on one of the public exchanges.

IRR: Internal Rate of Return. This is a calculation that determines what the rate of return is on a portfolio investment or on the total venture fund. One way to think about it is, if you put your money in a bank account that gives you 5.5% interest annually, you could say your IRR on that investment would be roughly 5.5% (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.


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