How to start a venture capital firm

Author:
Rita Astoor
Read time: 18 minutes
Published date: 3 December 2025

Learn the essential steps for launching a venture capital firm, from developing an investment thesis and structuring your fund to managing the complete fund lifecycle.

What is venture capital?

Venture capital (VC) is an investment strategy in which investors provide early-stage startups or private companies with cash in exchange for equity ownership in the company. The investors’ hope is that the startups will become more valuable over time so that when there is a liquidity event or other opportunity to sell off equity in the company, the investors might make a profitable return on their investment. To pursue these strategies, the VC investors pool their own capital with outside money from others to invest in startups. The VCs set up asset management firms to manage all of the funds they launch.

Venture Capital 101

Learn the fundamentals of starting a venture capital fund.

What is a venture capital firm?

A VC firm is a management company (manco) that raises and manages investment funds, acting as the hidden hand behind many of the most innovative early-stage companies. The firm itself is the ongoing business, while a VC fund is the specific investment vehicle that uses a private markets exemption to avoid the registration requirements of the Securities Act. The people who manage the firm and make investment decisions are called general partners (GPs), while the investors who provide the money for the fund are called limited partners (LPs); these roles are central to common fund structures.

The firm, run by the GPs, earns revenue by charging the fund management fees and a share of the profits, known as carried interest. This structure allows the GPs to build an enduring business that can raise and manage multiple funds over time.

VC firm vs. VC fund

VC firms are different from VC funds.

• The VC firm is the business that oversees the investment strategies of the VCs. It’s the entity you’re thinking of when you hear the brand name of a VC. It is the manco that rents office space, employs investment analysts, and subscribes to financial publications. Successful venture firms often operate several VC funds at one time—Fund I, Fund II, and so on.

• The VC fund is the legal entity that pools money to invest in assets like startups and pursues its own particular investment strategy. The fund then owns those assets until it sells them.

How to start a venture capital firm

In the steps below, we’ll outline the steps to setting up a new VC firm before raising your first fund. We've also summarized the information in our first-time fund manager checklist.

What problem are you trying to solve?

Before you can raise a new fund, you need to clarify the problem you’re trying to solve. Be as specific as possible about your intentions. Once you know the problem you want to solve—say, lack of capital for female founders at the seed stage, a lack of support for early-stage founders in the Midwest, or the development of innovative climate resiliency technologies—you can do some further research and refining.

Consider the following factors before you raise a fund:

• Your own expertise: What kind of experience and expertise do you have? Is your knowledge, skill set, or network an asset? What tools do you have at your disposal? Where will you need help?

• Your target demographics: Who are the founders and companies you want to help? What are their struggles and goals? What are their specialties? Where do they live and operate? Who are their target customers? How much capital have they historically raised and when? What kind of LPs will be interested in investing in these founders?

• The market landscape: Do institutional investors want access to your target demographic? Why or why not? What other companies and VC firms are trying to solve the problem you want to solve? Where are they succeeding and falling short?

The answers to these questions will either serve as the foundation to your fund strategy or guide you in another direction.

Building the founding team

Because a VC firm is a business, it needs a strong leadership team to succeed. The classic image of a startup launched by a team of co-founders with complementary skills holds true, especially for companies that successfully raise venture capital. An ideal team might include a partner with deep investment experience, another who is a former startup founder with operational expertise, and another with a strong professional network for finding deals and raising money.

Having someone else who can complement your own skills can be beneficial for your first time. For example, if you have a strong operational background as a former COO, you might want to partner with someone with a background in finance or with technical expertise. From there, you can figure out the basics, such as how you’ll pay yourselves, where your office will be, what equipment you’ll need, and who you need to hire next.

It is possible to start a firm as a solo GP. However, this path places a much heavier operational burden on one person. A solo GP must handle all aspects of the business, from VC investing to fund administration, which makes strong external partners and a robust technology platform essential for managing the back office.

The founding GP role

As a fund manager, you’ll be both an entrepreneur of your own firm and a fiduciary of outside capital. You’re responsible for attracting the attention of companies and founders, corresponding with LPs, constructing a portfolio, executing deals, and handling fund administration.

That’s why it’s helpful to start with the following (although not an exhaustive list):

• A compelling investment thesis
• Good relationships with founders
• Business or industry expertise
• A competitive drive to win deals
• A smart portfolio construction strategy
• Great networking skills
• Patience
• The ability to articulate why your fund is different
• The willingness to contribute financially

Building your track record

Before you can convince LPs to invest in your fund, you need to prove you can make successful investments. A track record is the most important evidence you can offer to show LPs that you know how to pick successful startups, and industry benchmarks provide a detailed snapshot of the latest data for fund returns.

Your track record is your past performance as an investor that details the types of investments you’ve made, why you made them, and what kinds of returns you’ve been able to secure. Prospective LPs have many firms and funds to choose from. To gauge your potential for success, they'll consider fund performance metrics like total value paid-in (TVPI), multiple on invested capital (MOIC), and internal rate of return (IRR).

How to develop your investment thesis

Your investment thesis is the strategic blueprint for your fund. It defines your firm’s unique point of view and guides every investment decision you make. A strong thesis provides clear answers to what you invest in, why you are positioned to win those deals, and how you will execute deal sourcing.

A well-defined thesis is also critical for your firm's operations. The types of companies you target and the size of your investments are key elements of portfolio construction that will determine your target fund size. This, in turn, dictates the management fee budget you will have to run the firm and pay for essential services. As Allison Barmen Gates, GP at Sempervirens, explained during Carta’s Building an Investment Track Record webinar, a structured due diligence process is key. She uses a framework called the “five Ts” to evaluate investment opportunities, which helps maintain strategic focus.

• Team: Is the founding team prepared and committed to building a large business?
• Technology: What is the quality of the technology and how can it adapt over time?
• Total addressable market: Is the total addressable market (TAM) large enough for the company to grow to the size needed for a venture-scale return? This type of return is what allows top-tier VC funds to deliver for their own investors.
• Terms: Are the investment term sheets structured in a way that allows you to generate a return for your investors?
• Tailwinds: Are there broad market trends, like the rise of AI or fintech, that will help this company succeed?

How to structure your firm and fund

Limited partnerships and limited liability companies (LLCs) are used to facilitate relationships between VCs and third-party investors, as well as operate the activities of the VC firm itself.

The process of fund formation is the most critical step in building a compliant and scalable VC business. This process involves creating the legal and financial architecture for both your manco and your investment fund. Mistakes made at this stage can create significant legal and operational problems down the road.

The limited partnership fund structure

In the United States, the standard legal structure for a VC fund is a limited partnership. This is a legal entity composed of an entity acting as the GP, which manages the fund, and the LPs, who invest in it. This structure is standard because it provides liability protection for the LPs, meaning they are generally not responsible for the fund's debts beyond their invested capital. LPs cannot be involved in the active management of the partnership.

The foundational legal document for the fund is the limited partnership agreement (LPA). The LPA is the rulebook that governs the relationship between the GP and LPs. It outlines all of the fund's terms, including its lifecycle, fees, and the scope of the GP's authority.

How to raise your first fund

Once your fund is legally set up, the next step is raising capital. This involves pitching your investment thesis to potential LPs and securing their capital commitments, often from institutional investors, family offices, or high-net-worth individuals. The fundraising process comes with a significant administrative burden that can distract you from building investor relationships.

How to recruit LPs to your first fund

Building a convincing fund thesis and conveying it in a professional pitch deck is challenging work. But it’s only half the battle. Finding LPs whose investment interests align with your fund thesis, and persuading them to invest capital in your fund, is your next challenge.

Most VC funds raise under regulatory exemptions that prohibit them from advertising or making public solicitations for capital contributions. That means you can only fundraise from your existing personal and professional networks. The number of potential LPs in your networks may depend on your background, your work experience, and where you live.

How to build your operational foundation

A modern VC firm should run on integrated VC solutions, not a patchwork of spreadsheets and disconnected service providers. Building a scalable business requires a solid operational foundation from day one. This means choosing partners and systems that can grow with you.

This might include:

• A fund administrator to help manage all of the back office needs for your fund
• A bank where you can open bank accounts for your fund
• An audit firm if your fund needs to be audited
• A tax provider to help prepare tax filings
• A lawyer to help you draft the LPA and other fund documents and negotiate with LPs

Fund administration

Fund administration is the operational engine of your firm. It includes the critical back-office functions of accounting, financial reporting, and treasury management.

How VC economics work

To manage your firm effectively, you need to understand its business model. A VC firm has two primary income streams: management fees and carried interest. These are often referred to as the industry's standard fee structure.

Management fees

The management fee is the predictable income stream that keeps the lights on at your firm. It is typically calculated as a small percentage of the fund's committed capital and is paid annually.

Carried interest

Carried interest, or carry, is the performance-based compensation for the GP. It represents a share of the fund's profits and is the primary incentive for generating strong returns.

Starting a VC firm is a complex but rewarding journey. Building a strong operational foundation from day one is critical for long-term success and allows you to focus on what matters most: finding and funding the next generation of great companies.

Frequently asked questions about starting a venture capital firm

What is a venture capitalist?

A venture capitalist is an investor who provides funding to early-stage or growth companies in exchange for equity, aiming for high returns as the company grows.

How do I find and attract limited partners (LPs)?

Find and attract LPs by leveraging your personal network, building relationships with angel investors, family offices, and institutional investors, and clearly communicating your fund’s unique value and track record.

What is “2 and 20” in venture capital?

“Two and 20” refers to the standard fee structure in the VC industry, which consists of a 2% management fee and 20% carried interest.