Venture Capital

How venture capital works

The basic structure:

• Limited partners (LPs) — pension funds, endowments, family offices commit capital.
• General partners (GPs) — manage the fund, source deals, support companies.
• Fund — pooled capital deployed over 3-5 years.
• 10-year typical lifespan with extensions.
• Returns distributed back to LPs as portfolio companies exit.

The 2-and-20 fee structure is common (2% management, 20% carried interest).

Investment stages

Several phases:

• Pre-seed/seed — earliest stage, highest risk, potential for biggest returns.
• Series A — product-market fit established.
• Series B-D — scaling.
• Growth/late-stage — pre-IPO; lower risk, lower return.

Different funds specialize in different stages.

Why VC matters

Several roles:

• Innovation funding — financing risky early-stage ideas.
• Job creation — VC-backed companies are major employers.
• Tech ecosystem — funded much of modern tech.
• Wealth creation — both for entrepreneurs and successful investors.

Most major tech companies were VC-backed at some stage.

VC returns

The mathematical reality:

• Power law distribution — few investments produce most returns.
• 2-3x median fund return — for top quartile.
• Most funds fail to produce strong returns.
• Top funds dominate — Sequoia, Benchmark, Accel, etc.

VC is a hits-driven business; access to top funds matters more than fund existence.

VC in crypto

Major variations:

• Crypto-native funds — a16z crypto, Paradigm, Polychain, Multicoin.
• Token-based exits — different from equity-only.
• Faster liquidity — public tokens vs. waiting for IPO.
• Different alignment — token holders vs. equity holders.
• Token-equity hybrid — common in crypto.

Crypto VC operates somewhat differently from traditional tech VC.

Common criticism

Several concerns:

• Overvaluation cycles — easy money produces inflated valuations.
• Narrow demographics — historically concentrated among certain backgrounds.
• Pressure for unicorns — distorts company strategy.
• 2021 excess — pandemic-era funding produced many failures.
• AI hype — current focus may produce similar excesses.

The industry has structural issues alongside its successes.

Access for individuals

Major limitations:

• Direct VC access — typically requires accredited investor status and significant capital.
• VC funds — high minimums ($250k+, often millions).
• Indirect access — public companies investing in private (e.g., SoftBank).
• Crypto angel investing — easier access via tokens.

Most retail can't directly invest in VC.

What individuals should know

For most:

• VC is largely inaccessible to retail investors.
• Public market alternatives exist for tech exposure.
• Crypto opens some access but with high risk.

For aspiring VCs:

• Network access matters more than capital.
• Top firms dominate returns.
• Entry typically through analyst/associate roles or operator backgrounds.

Venture capital plays a major role in funding innovation. Understanding how it works clarifies tech industry dynamics, even for those who can't directly participate.