Insights · Venture capital · 7 min read
Your VC is raising money too
Venture capital terms make far more sense once you see the VC's own position. A VC firm is itself a fundraiser, judged by its investors the way it judges you. Understanding that is the single most useful thing a founder can do before negotiating a term sheet.
By Andrew Hayes · Adapted from chapter 8 of The Capital Raising Ladder
A VC raises each fund from investors called limited partners (LPs): super funds, family offices, funds-of-funds, endowments, corporations and wealthy individuals. Those LPs want their money back, with a large multiple, within a fixed time. Almost everything a VC does at your board table flows from that.
Three numbers that shape every VC's behaviour
3–5x
The multiple on invested capital that LPs ideally look for from a VC fund as a whole
~14 years
How long a VC manager can be on the hook to LPs for a single fund, from first close to final distribution
12–24 months
Typical time for an emerging manager to raise a first fund
US emerging-manager experience, as reported in Fundingstack's guide to raising a venture fund. Australian funds face the same logic.
How a VC fund makes money
Most funds earn two kinds of income. A management fee, commonly around 2% of committed capital a year during the investment period, pays salaries and running costs. Carried interest, commonly around 20% of the fund's profits, rewards the managers only once LPs have their money back. The fee keeps the lights on; the carry is where VCs make their real money, and it only arrives if the fund produces large exits.
Worked example · the fund-returner test
A $100 million fund that owns 10% of a company when it is sold needs that sale to be worth $1 billion just to return the whole fund once. To return 3x, it needs several outcomes of that size, or one much larger. That is why a VC asks whether your company could be worth $1 billion or more, even when a $100 million outcome would change your life.
Why a few winners must carry the fund
Most startups fail or return little. Correlation Ventures' study of more than 21,000 US venture financings from 2004 to 2013 found that almost two-thirds failed to return the capital invested, and only about 4% returned more than 10x. A follow-up a decade later found much the same pattern. A broadly diversified VC portfolio has a high chance of returning about 2x, which is not enough for LPs seeking 3–5x. To get there, a fund needs a handful of investments that return many times the whole fund. This is the power law of venture capital.
It explains three things founders often find frustrating:
- VCs pass on good businesses. A company that will reliably grow into a profitable $50 million business may be a great investment for you, but it cannot return a $200 million fund.
- VCs push for speed. A fund has a fixed life, so its managers need outcomes within it.
- VCs ask for protective terms. Liquidation preferences, anti-dilution and board seats protect the fund's downside on the many investments that won't be outliers.
Real-world example · Blackbird and Canva
Blackbird Ventures, founded in 2012, invests through ESVCLPs and counts AustralianSuper, Hostplus, HESTA, Telstra Super and the Future Fund among its more than 300 investors. Its first cheque into Canva, at seed stage in 2012–13, was $250,000.
By August 2023 Blackbird held about 15% of Canva. It sold three percentage points of that stake for about $150 million at a US$25.5 billion valuation, with its remaining holding worth about A$5 billion. Hostplus, a cornerstone investor in Blackbird's 2015 fund, received about $17 million from that sale alone.
Why sell part of its best investment? Because Blackbird's early funds were nearing the end of their fixed lives. The fund clock forced a return of capital to LPs, even from a company that was still growing. That clock applies to every VC on your cap table.
When VCs find it hard to raise, you feel it
VC funds go through their own cycles. In 2025, global VC fundraising fell to US$118.6 billion, a decade low, even as deal value rose to US$512 billion, concentrated in AI. When LPs are cautious, VCs become more selective, reserve more money for their existing portfolio and back fewer new companies. Founders feel this as longer processes, more due diligence and tougher terms, often without knowing why.
What LPs, and good advisers, look at
- Cash returned, not paper gains. LPs judge a fund on distributions to paid-in capital (DPI). A fund with big paper gains but little cash back faces hard questions when it raises again.
- Reserves. Many funds set aside about as much for follow-on investments as for first cheques. A fund that has run out of reserves may not support your next round, however well you're doing.
- Signalling. If an existing investor declines to follow on, new investors will ask why. That makes a VC's reserves policy important to you.
- The fund's history. An experienced adviser can tell you a fund's age, its record of following on, and how it has treated founders in down rounds.
Seven questions to ask a VC before you take their money
Due diligence runs both ways.
- Which fund would this come from, and how old is it? A fund late in its life will need an exit sooner.
- How much do you reserve for follow-on investments, and how have you used reserves in the past?
- Who will join our board, and how much time will they give us?
- How have you behaved when a portfolio company struggled? Ask for introductions to founders whose companies didn't succeed, not just the winners.
- What do you expect from us in the next 12–18 months? Milestones, hiring, metrics.
- How do you think about exits, and on what timeline?
- Who are your LPs, and is there anything about them we should know? For example, corporate LPs with strategic interests.
The answers tell you whether the fund's needs line up with yours. A mismatch discovered after the round is far harder to fix.
Decoding what VCs say
| What you hear | What it often means |
|---|---|
| “We love it, keep us posted.” | Not now; possibly later if traction improves |
| “We'd want to see someone else lead.” | Interested, but not enough to set the terms |
| “It's not a fit for this fund.” | The size, stage or sector doesn't match, or the exit isn't big enough |
| “We're very founder-friendly.” | Ask for references from founders whose companies struggled |
| “We can move quickly.” | Ask for the partner-approval and due diligence timeline in writing |
| “Our standard terms are…” | There is usually room to negotiate |
What this means for founders
- Pitch the outlier case. Show a credible path to an outcome large enough to matter to the whole fund, not just a good business.
- Expect protective terms, and model them. Negotiate preferences, anti-dilution and board composition with the waterfall in front of you.
- Ask about their fund. A VC in year eight of a ten-year fund behaves differently from one in year two.
- Pick investors who will support the next rung. A fund with reserves and a record of following on can carry you to Series B; one without may leave you raising alone.
Every VC is managing someone else's money against a clock. Know where they are on that clock before you sign.
And remember that venture capital is one rung, not the whole ladder. Many strong Australian businesses never need it: Atlassian bootstrapped for eight years before taking venture money.