99% of ppl in VC interviews can’t explain how money actually flows thru a fund. Here’s the 3-min version that will put you in the top 1%. Most people think it’s simple: VCs raise money → invest in startups → make returns. But here’s how it actually works 👇 1. Limited Partners (LPs) - pension funds, endowments, family offices commit capital. 2. The General Partners (GPs) also commit their own money (usually ~1-2% of the fund). 3. Capital isn’t wired upfront - the fund makes capital calls over time as investments are made. 4. The fund (not the firm) owns equity in startups. 5. When there’s an exit, proceeds flow back into the fund. 6. First, LPs get their capital back + preferred return. 7. After that, GPs earn carry (their share of profits) And that’s the simplified version. In practice, you also have: - Multiple funds running in parallel, each with unique terms - Recycling of capital for new or follow-on investments - Complicated waterfall models for distributions - Ownership tracked across dozens of companies Raising a fund isn't as simple as collecting money and investing it. It is an administrative and logistics undertaking and you actually spend more time than you think being a CFO / administrator than investing. ♻️ Repost to help someone in your network! Image source: DealRoom

How do VCs actually underwrite seed investments? Let me explain: At the seed stage, investors aren’t modeling cash flows, they’re modeling outcomes. Every check is underwritten using exit math to answer one question: Can this investment return the fund? Here’s how the math works. 1. Start with a target outcome VCs begin by imagining a huge exit (often a $500M to $1B outcome). They’re not expecting every company to get there, but they need to know it’s possible. 2. Target ownership Investors back into initial ownership based on what ownership they want at exit (taking into account dilution from future rounds). If a fund owns 10% of a company that sells for $500M, that stake is worth $50M. On a $100M fund, that one investment could return half the fund. If the company hits $1B, it could return the entire fund. 3. Dilution assumptions Ownership doesn’t stay constant. By Series C, early investors may be diluted 30-50%. That 10% seed stake might shrink to 5-7% at exit. The exit has to be big enough to compensate for that. 4. Portfolio construction Most funds assume only 1-2 companies will drive total fund returns. Every seed bet must have the potential to return the fund on its own, even if most never will. The takeaway: VCs use exit math to decide whether a company could be one of the few that move the needle. That’s the underwriting lens behind every seed check.