If you’re hoping to secure venture capital funding, you’ll need to know what a venture partner is. These are the individuals who help determine whether your business is worth investing in. They could also be the ones overseeing the venture capital firm’s investment in your company for the foreseeable future.
This article will cover these three points:
- What’s a venture partner?
- Why founders need to understand the venture partner’s role
- How a venture partner is compensated
What’s venture capital?
Startups need capital they can use to either get off the ground or accelerate growth.
The first way to fund your company is to sell your product or service. However, this might take too much time if you want to scale rapidly. There are several other ways to raise capital, each coming into play at different stages of an organization’s growth.
The first method is using your cash. The second one is asking friends, relatives, and acquaintances to invest in your venture. Next, you’ll ask outside investors, and after that, try to secure private equity. Once business is booming, you can sell shares through an IPO (initial public offering).
Venture capital is equity financing that gives startups the ability to raise funds before they've started operations or begun earning revenues.
A typical VC firm hierarchy
The structure of a typical VC firm consists of three entities:
Venture Capital Fund
Venture capital funds are private equity investment vehicles seeking to invest in firms with high risk/high return profiles. They differ from mutual and hedge funds in that they focus on a specific type of early-stage investment.
A startup that receives VC funding has high-growth potential, is exceedingly risky and has a long investment horizon. Partners at VC firms take an active role in their investments by offering guidance and often sitting on the board of directors.
In the past, venture capital investments were only available to professional venture capitalists but now accredited investors can participate in venture capital investments. However, VC investing remains mostly unavailable to ordinary investors.
The management company collects management fees from the fund. It uses those funds to pay for fund expenses such as rent, utilities, business services, and Internet. It also pays the salaries of managing partners and reimburses them for expenses. This is in addition to any carried interest partners earn from the fund.
Managing partners are compensated with a combination of salary and carried interest, while most other staff only get a salary. All financial documents such as term sheets are signed and stamped under the management company's name.
This is the legal entity that serves as the general partner to the venture capital fund and makes management and investment decisions for it. It’s usually set up as an LLC. In return, it receives carried interest.
Roles in a venture capital firm
Managing partners used to be called general partners. However, the term "general partner" isn't used much anymore because it implies unlimited personal liability. Members of VC firms have been advised by their lawyers to retire the title.
The senior-most role at a venture capital firm is a managing partner, also known as a managing director. These are the individuals who have the final say about where the fund's investment dollars go. Unless there's a single managing general partner, they vote on the deals the firm’s considering executing. They also do most of the networking and fundraising.
Some larger firms have smaller managing partner committees that wield all the power. Usually, the managing partner leading the investment round for a startup also sits on the startup’s board of directors. Managing partners are compensated through management fees and get the lion’s share of the carried interest.
Principals are just below managing partners in the hierarchy. Principals play a significant role in scouting startups for new investment opportunities. In some firms, they lead the due diligence team and perform financial analysis on prospective portfolio companies.
Although they don't usually lead deals, principals are trusted team members, which allows them to be part of the decision-making process. About 50% of them have direct fund carry.
Associates are the more junior members of the investment team. Unlike principals, they don't lead investments. Instead, they're the first VC staff a business meets with as a sort of pre-screening process.
Entrepreneurs in residence
An entrepreneur in residence (EIR) is an individual who works in a large venture capital firm. They lead or start early-stage companies with high-growth potential.
EIRs are given working capital to start new companies, nurture expansion, develop new products, or restructure a company’s ownership, management, and operations. The firm benefits by getting access to the company started by the EIR because the managing partners are usually the first investors in the EIR’s new company.
EIRs evaluate investment opportunities for the VC firm. They also help the firm obtain industry connections, scout for new opportunities, and do due diligence on portfolio companies. EIRs are often successful entrepreneurs who work at a VC firm while they figure out their “next big idea.”
EIRs differ from venture partners in that venture partners source multiple deals, while an EIR sources a single deal.
These could be roles like marketing coordinators, investor relations managers, vice presidents, controllers, or CFOs. The more assets under management, the more staff a VC firm will have.
What’s a venture partner?
Larger venture capital firms employ venture partners (also known as operating partners). They’re veteran investors or experienced entrepreneurs who aren’t full partners of the firm. A venture partner can be a full or part-time position.
Venture partners are brought in by a partnership to uncover new investment opportunities and manage portfolio companies. They can also act as advisors for portfolio companies and sit on their board of directors.
Venture partners have a thorough understanding of your company's industry and know how to put together a deal. However, they don't have the authority to independently approve a deal, which means they must build internal support for it with the managing partners.
Even though a venture partner isn't a permanent part of the firm, they can remain with it for years. Examples of venture partners include retired partners who still want to occasionally do deals or an individual who's in line to become a full partner.
A venture partner could also be a former general partner who wants to step away from daily operations because they’re tired of the responsibilities. It might be a tech expert whom the firm wants to retain to help vet deals. A venture partner could even be a managing partner in training.
Why founders need to understand the role of a venture partner
As a founder, you need to become familiar with a venture partner's role because your sponsor at a venture capital firm could be one. The venture partner model works well in the right situation and with the right individuals. However, there are inherent risks in the model. That’s why it’s crucial to understand the role and how it can affect you.
If you’re a startup founder being funded by a VC firm and your deal is sponsored by a venture partner, you’ll need to assess how likely it will be for the venture partner to stay with the firm for the seven to ten years you’ll need them.
Venture partner compensation
Some firms pay venture partners cash compensation. Others pay out the carried interest (the share of profits from an investment general partners receive at a VC firm) on the deals venture partners source and manage.
If a venture partner gets a salary, it’s paid from the management fees. The salary range for a venture partner is anywhere from $50,000 a year to $200,000 or more a year.
Venture partners don’t usually have carry in the funds themselves. Instead, they might have deal-specific carry for companies they’re involved in. In some firms, they have general fund carry. The amount of carry a venture partner gets widely varies. It can be as high as 25% of the total carry on the deal.
A firm cannot give a venture partner carried interest if it doesn't have it. For example, say a venture partner generates a $75 million gain for the firm and expects 25% of the carry. They won't get their share if the total gains on the fund are non-existent because of bad investments.
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