Venture capital firms are investment firms that use capital raised from limited partners or partnerships (LPs) to fund companies, often start-ups. Venture capital firms are not to be confused with venture capital funds, which refers to the pool of investment money raised by LPs and given to the firm. Firms can then disperse the money as they see fit. In exchange for an investment, venture capital firms often receive a minority stake in the funded company. Firms nearly always manage more than one investment at a time. Investments typically last from six to ten years.
Venture capital firms generate income for themselves through management and performance fee collections. Fees are variable but are typically determined by the "2-and-20 rule," in which management fees total 2% of the worth of assets under management (AUM) and performance fees total 20% of investment profits. Those who work at a venture capital firm are called venture capitalists.
