Before you pitch a venture capital fund, it helps to understand what you are actually selling to. A VC is not a rich person spending their own money, and they are not a bank. A VC fund is a business with its own investors, its own rules, and its own clock. Once you see how that business works, the questions VCs ask and the outcomes they push for will stop feeling random and start making sense.
What a VC fund actually is
A venture capital fund is a pool of money that a management team raises from outside investors and then invests into startups on their behalf. Two roles matter here. The General Partners (GPs) are the investors you meet: they source deals, decide what to back, sit on boards, and manage the portfolio. The Limited Partners (LPs) are the people and institutions who supply the actual capital but stay hands-off. When a partner tells you "we invest out of a $100 million fund," that money is not theirs. They raised it, and they have to give it back with a profit.
Who the LPs are
LPs are typically institutional and high-net-worth investors: family offices, corporates, pension funds, endowments, sovereign wealth funds, and wealthy individuals. In India, an important LP is the government-backed Fund of Funds for Startups (FFS), set up in 2016 with a ₹10,000 crore corpus, monitored by DPIIT and operated by SIDBI. Crucially, the FFS does not invest in startups directly. It commits capital into SEBI-registered funds, which then invest in companies. As of March 2025, SIDBI had committed over ₹11,000 crore across 144 funds. A second ₹10,000 crore Fund of Funds was approved by the Union Cabinet in 2026. Alongside this, Indian family offices and HNIs have become major backers of domestic funds.
How Indian funds are structured: the AIF
In India, a VC fund is legally structured as an Alternative Investment Fund (AIF), registered with SEBI under the SEBI (AIF) Regulations, 2012. Venture capital funds sit in Category I, under the Venture Capital Fund sub-category. A few rules shape how these funds behave:
- Each scheme needs a minimum corpus of ₹20 crore.
- The minimum investment per investor is ₹1 crore, so LPs are institutions and wealthy individuals, not the general public.
- At least two-thirds of the corpus must go into unlisted equity or equity-linked instruments, which is exactly the early-stage risk you represent.
- Category I AIFs are close-ended with a minimum tenure of three years, so the fund has a fixed life and a fixed pool of capital.
How VCs make money: fee and carry
VCs earn in two ways, often summarized as "2 and 20." First, an annual management fee, traditionally around 2% of committed capital, which pays salaries and running costs whether or not the fund succeeds. Second, carried interest, or "carry," traditionally 20% of the profits the fund generates, usually only after LPs get their capital back plus a preferred return, or hurdle, often around 8%. Carry is where partners get genuinely wealthy, and it only pays off if the portfolio produces large exits. These numbers are conventions, not law: some Indian funds now use lower fees and different hurdles, but the two-part structure is standard.
The fund lifecycle
A fund typically runs about 8 to 10 years. Early years are the investment period, when new startups get funded. Later years are for supporting winners and pushing toward exits so capital can be returned to LPs. Because the fund has a deadline, VCs cannot hold your company forever.
What this means for you
This structure explains almost everything about how a VC will treat your fundraise:
- They need exits. LPs get paid only when the fund sells its stake through an acquisition or IPO. A profitable business that never sells does not return their fund.
- They need outsized outcomes. Most startups fail, so VCs rely on a few companies returning the entire fund. They will ask if you can become very large, not merely stable.
- Timing matters. A fund early in its life has capital to deploy and time to wait. A fund near the end may hesitate on a company that needs many more years.
- They answer to someone. Partners are accountable to their LPs, which is why they diligence hard and expect regular reporting once you take their money.
You are not asking a VC for a favor. You are offering them a shot at the kind of return their own investors expect. Understanding that puts you on equal footing.