How Does Venture Capital Work?

How a VC Fund Works: Explained Like You're Hanging Out with the Friends Gang

It all started at Central Perk, over too many lattes and one big question:
"What if we took our savings, skipped adulting, and just… funded some startups?"

Ross immediately launched into a speech about diversification. Monica wanted a 10-year operating plan with laminated tabs. Rachel asked if investing in fashion-tech counted. Joey said, “If this helps me afford more sandwiches, I’m in.”

Sounds ridiculous? Sure. But beneath the chaos, that’s how a venture capital fund works: big dreams, bigger risks, and a bunch of people trying to turn coffee-shop conversations into billion-dollar businesses.

Let’s break down how a VC fund works, in Friends' style.

Meet the People Behind a VC Fund

Imagine the startup world is like the Friends gang.

LPs (Limited Partners) are like Gunther. They're in the background, often overlooked, but crucial. They own the café (the money). Pension funds, universities, billionaires, these are your Gunthers. Quietly funding the whole thing, hoping Rachel (your startup) finally notices them with a big payoff.
VCs (General Partners) are Monica; they run the kitchen, manage the chaos, obsess over the ingredients (startups), and hate losing. They take the LPs’ money and try to whip up the perfect startup soufflé.
Startups are Joey, Phoebe, Chandler, Rachel, and Ross, all chasing big dreams, often broke, sometimes brilliant, sometimes ridiculous (looking at you, Joey’s “Ichiban” commercial). They're the reason this whole show exists.

The Life Cycle of a VC Fund

Starting a VC fund is like Monica opening her restaurant.

LPs give Monica (VCs) money and say, “Here’s $100M, go make something amazing.”
But here's the catch: it’s a closed kitchen. Monica can’t keep asking for more money. She’s got 10 years to make it work.
- First 2 to 4 years: She picks her dishes (startups).
- Remaining years: Waits to see which dishes customers love (which startups grow, get acquired, or go public).

If the customers leave happy (startups succeed), everyone gets paid. If not... well, let’s just say Monica’s back to catering Thanksgiving dinner with grilled cheese.

The VC Fund Playbook: Betting on the Few

VCs know not every startup will be a hit.

It’s like casting for a spin-off show:

5 actors? Total flops.
3? Might get a couple of episodes.
1 returns your investment.
And one becomes Joey—a full-fledged (albeit questionable) spin-off.

That one breakout success needs to pay for all the others. That’s called the Power Law: a small number of winners generate all the returns.

So yes, VCs are casting directors hoping to find the next Rachel Green before she gets poached by Ralph Lauren.

How a VC Fund Makes (and Spends) Its Capital

VCs don’t do this out of love (okay, maybe a little). They get paid in two main ways:

1. Management Fee (2%)

This is like Monica charging a hosting fee for cooking dinner every night. Whether or not the food is good, she still gets paid.

If she’s managing $100M, she makes $2M a year to keep the lights on, pay her team, and yes, cover the occasional coffee at Central Perk.

2. Carry (20%)

This is the jackpot. If the restaurant becomes a hit, Monica keeps 20% of the profits after giving the original money back to the investors.

Say her fund grows from $100M to $300M:

LPs get back their $100M, plus 80% of the remaining $200M = $160M
Monica and her team keep 20% = $40M

That $40M is called carried interest. It’s why VCs dream of funding the next Uber (or, in Friends terms, the next Smelly Cat album going platinum).

How a VC Fund Finds Deals

Finding great startups is like the Friends’ dating lives: constant, chaotic, and full of surprises.

VCs don’t sit back and wait. They:

Go to demo days (like Joey’s auditions)
Stalk Twitter and LinkedIn (modern dating)
Ask other founders for intros (Ross-level networking)

Once they find a promising one, they invest in rounds: Pre-seed, Seed, Series A, B, C... Each round gives the startup more money, and the VC more ownership.

But every round also means dilution, just like Joey having to split his pizza with more people each season.

The Highs and Lows of a VC Fund Portfolio

Most startups will flop, just like Joey’s short-lived stint as Dr. Ramoray.

Some run out of money.
Others can’t find product-market fit.
A few get friend-zoned by customers forever.

But once in a while, a Rachel lands a Vogue cover, a unicorn is born. The startup exits, the VC fund celebrates, and LPs rejoice like it’s Thanksgiving with no turkey mishaps.

Why Understanding a VC Fund Matters

Even if you’re not raising money or building an app, knowing how VC works helps you decode the world you live in.

Every app you use, every founder you follow, every IPO you read about, it all traces back to this quirky, risky, oddly Friends-like game of venture capital.

So the next time someone says, “I work in VC,” you can smile, sip your coffee, and say:

“Could your carry BE any better this year?”

TL;DR: How a VC Fund Works

LPs give VCs (Monica) money to invest in startups (the gang).
VCs invest for 2 to 4 years, wait for exits over 10 years.
They earn 2% annually in fees, 20% of profits (carry).
Most startups fail, but one Joey-like breakout can carry the entire fund.
Venture capital is risky, high-reward, and more dramatic than Ross and Rachel’s break.

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