In the context of Venture Capital (VC), fundraising refers to the process by which venture capital firms raise capital from investors to form a fund. Here's how it typically works:
- Fund Formation: A venture capital firm decides to raise a new fund. This involves creating a legal structure for the fund, setting its investment strategy including investment thesis, and determining the target fund size.
- Pitching to Limited Partners (LPs): Venture capital firms, acting as the general partners (GPs), reach out to potential investors, known as limited partners (LPs). These LPs can include institutional investors, pension funds, endowments, high-net-worth individuals, and others.
- Fundraising Pitch: The VC firm presents its investment strategy, track record, and potential for returns to persuade LPs to commit capital to the fund. This is essentially a pitch to convince investors that the VC firm has the expertise to identify and invest in promising startups.
- Capital Commitments: Interested investors commit a certain amount of capital to the fund. This commitment is not immediately called upon but represents the investor's willingness to contribute when the fund makes investment decisions.
- Closing the Fund: Once the VC firm has secured commitments that meet or exceed its target fund size, it formally closes the fund, and the committed capital is collected from the LPs. Typically you have a First Close, Interim Closes (2:nd, 3:rd etc) and Final Close.
After this the fund goes in to the investment phase, portfolio management and finally Returs/Exit Phase.
Fundraising is a critical aspect of the venture capital ecosystem.
