How VCs Make Money: A Founder’s Guide to Venture Capital Economics

Raising venture capital can feel like stepping into a world of complex terms, opaque structures, and mysterious decision-making. But at its core, the VC business model is straightforward, and understanding it is critical if you want to win over investors.

Here’s a founder-friendly guide to how venture capital actually works.

Who’s Who in VC

Think of venture capital as a relay race:

• Limited Partners (LPs): Pension funds, institutions, and family offices who provide the money.

• General Partners (GPs): The fund managers who pick startups and chase returns.

• Startups: The portfolio companies that (hopefully) grow big enough to provide exits.

💡 Flow of capital: LPs → VCs → Startups → Exits → Returns back to LPs & GPs.

The Exit Game

Here’s the uncomfortable truth: until a startup exits, no one makes money. VCs cash in only when there’s an IPO, acquisition, secondary sale, or founder buyback.

That’s why investors care so much about your exit story. Without one, there’s no way for them to return capital to their LPs.

Portfolio Math: Why One Big Win Matters

In a typical fund of 25 startups:

• 15 will fail outright.

• 7 might return 1–3x.

• 1 or 2 “fund-makers” deliver 100x+.

This is why VCs hunt unicorns. A single massive success pays for the losses, and drives the fund’s performance.

How VCs Get Paid

VCs make money in two ways:

• Management Fee: Around 2% annually, to keep the lights on.

• Carried Interest (“Carry”): After LPs get their initial investment back, profits are split usually 70–80% to LPs, 20–30% to the GPs.

Example: A $500M fund that grows to $1.2B over 10 years.

• First $500M returns to LPs.

• Of the $700M profit: $490M goes to LPs, $210M to GPs.

VC Economics in a Nutshell

• LPs provide the capital and take the bigger share.

• GPs earn through fees and carried interest.

• Startups are the bets, but only one or two need to win big.

WOWS Insight 

When you pitch a VC, remember: they’re looking for the fund-makers.

Don’t just polish your deck. Prove that you can be the 100x story, with a growth engine, a credible path to exit, and the resilience to carry a fund on your back.

That’s what turns a “maybe” into a “yes.”