VC firms make money in two primary ways:

• Management Fees: The firm charges an annual management fee (typically around 2% of the fund’s total capital) to cover operating costs.
  
• Carried Interest: This is the performance-based portion—usually around 20% of the profits from successful investments—that is paid to the general partners after returning the original capital and a preferred return to LPs.
  

Why Do Startups Seek Venture Capital?

Startups seek venture capital when they require substantial funding to grow, but may not have access to traditional bank loans due to a lack of assets or stable cash flow. Beyond financial resources, VC firms offer expertise, industry connections, and credibility that can help startups achieve success.

Risks and Rewards

Venture capital is a high-risk, high-reward business. Most startups fail, but the few that succeed can deliver enormous returns that compensate for losses. This risk profile requires VC firms to build diversified portfolios and adopt a long-term view.

In summary, venture capital firms act as intermediaries between investors looking for high-growth opportunities and startups that need funding and expertise to achieve their potential. By taking calculated risks and offering more than just capital, VC firms have become key players in fostering innovation, economic growth, and entrepreneurship globally.