1.3 VC Fund Lifecycle
Listen to FUND LIFECYCLE as a deep dive podcast!
The investment fund lifecycle encompasses the series of phases through which a fund is established, deploys capital, monitors and supports portfolio companies, and ultimately exits those investments in order to generate returns for stakeholders, namely the GP and the LPs.
This progression typically begins with the formation and fundraising stage, during which legal structures and governance mechanisms are finalized, followed by the active investment period, wherein fund managers select and negotiate deals that align with the fund’s strategy.
Portfolio management then involves providing oversight, strategic guidance, and operational support to investee companies to enhance valuation and mitigate risks.
The lifecycle concludes with the exit stage, in which assets are harvested through routes such as mergers and acquisitions, public offerings, or secondary sales, culminating in the distribution of profits to investors in accordance with the partnership agreements.
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This all begins with a critical preliminary pre-fund step - maybe the most important for a new fund...
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Pre Fund Conception:
Defining the Fund's Investment Thesis.
The investment thesis serves as the guiding principle for the fund's activities, outlining the specific sectors, emerging technologies, and geographic regions that the GPs believe hold the greatest potential for significant growth and innovation.
Developing a robust investment thesis involves a number of key considerations:
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The GPs must define the fund's particular focus, which might include specializing in specific industries such as financial technology (fintech), healthcare, or artificial intelligence (AI), or targeting companies at particular stages of development, such as seed-stage, early-stage, or growth-stage ventures.
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They also need to determine the fund's geographic focus, deciding whether to invest globally, regionally, or within specific countries. The investment thesis will also specify the typical size of the initial investments the fund intends to make (the average check size), the level of ownership in portfolio companies the fund will seek to acquire, and the anticipated return profile for the fund's investors.
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Furthermore, the GPs will establish the target size for the overall fund, representing the total amount of capital they aim to raise from Limited Partners, and the approximate number of individual portfolio companies they plan to invest in to achieve adequate diversification.
Finally, at this conceptual stage, the fund will also be given a name. ​
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Insight: A clearly defined and compelling investment thesis is of paramount importance for a venture capital fund. It serves as a strategic compass, guiding the GPs in their search for and selection of investment opportunities. Moreover, it is a critical tool for attracting Limited Partners whose investment objectives and risk tolerance align with the fund's proposed strategy. A well-articulated thesis, especially one that leverages the unique expertise and market insights of the GP team, can significantly differentiate the fund in a crowded and competitive market for investor capital.
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Fund Formation and Fundraising
Now that the GP is done defining the fund’s investment thesis, sector focus, and target return profile, potential Limited Partners (LPs) are approached with marketing materials and a compelling value proposition. Once the fund’s capital commitments are secured, legal structures and agreements are finalized.
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Typical agreements include the Limited Partnership Agreement, which outlines key terms such as fund duration, management fees, and carried interest. During this phase, the General Partner (GP) establishes the Management Company to oversee day-to-day operations on behalf of the fund.
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Investment Period
After securing commitments, the fund proceeds with sourcing deals and deploying capital. Due diligence, deal negotiation, and term sheet preparation occur throughout this period. Capital calls are issued to LPs as investments are made.
Investment strategies vary, reflecting stage focus (seed, early, or growth), industry specialization, and the size of equity stakes sought. The GP is responsible for screening opportunities, conducting rigorous analysis, and ensuring that each potential investment aligns with the fund’s objectives.
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Portfolio Management
Once initial investments are completed, the GP actively manages the portfolio, often taking board seats or providing strategic guidance to portfolio companies. Typical support includes advising on product development, market entry, hiring strategies, and follow-on financings.
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Continuous monitoring of portfolio company performance allows for timely follow-on investments or reallocations of capital. Effective portfolio management can significantly influence overall fund returns.
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Exit and Harvesting
Exits generally occur through mergers and acquisitions (M&A), initial public offerings (IPOs), or secondary transactions. The GP’s goal is to maximize returns by identifying the optimal market conditions and timing for each exit.
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Upon successful exit events, distributions are made to LPs in accordance with the profit-sharing agreements in the Limited Partnership Agreement. The GP’s carried interest is typically received once the fund’s preferred return or hurdle rate has been met.
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Wind-Down or Extension
A typical venture capital fund has a lifespan of around ten years, though extensions of one to two years may be granted to maximize returns on remaining portfolio positions.
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As the fund nears the end of its term, remaining investments are either exited or wound down. The partnership is dissolved once all assets have been distributed.
For Further Reading
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The venture capital fund lifecycle from formation to exit
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This Zapflow article outlines the typical stages a VC fund goes through, starting with Formation (defining GPs/LPs), Creating a Strategy/Thesis, Fundraising from LPs, Establishment (legal setup), Investing (including deal sourcing, due diligence, negotiation), Managing the Portfolio, and ultimately Exiting investments. ​
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Life Cycle of a VC Fund and Capital Allocation
Seraf Investor explains the standard 10-year VC fund timeline (often with 2-3 year extensions). It details the distinct phases: an initial investment period (typically the first 1.5-3 years for new portfolio companies), followed by a phase focused on portfolio company growth, follow-on investments, and eventual exits. It also discusses capital allocation strategies between initial and follow-on funding. ​
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https://seraf-investor.com/compass/article/charting-course-building-winning-vc-fund-strategy-part-ii ​
The Basics of Venture Capital
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VC Lab describes the fund lifecycle as a multi-stage process typically spanning around 10 years. It covers the Fundraising Phase (pitching LPs), the Investment Phase (deploying capital, usually 3-5 years), the Management Phase (supporting portfolio companies), the Exit Phase (IPOs, M&As), and the final Winding Down phase (distributing returns). ​
https://govclab.com/2023/11/29/the-basics-of-vc-funds/ ​
VC Fund Mechanics 101: Understanding the Fund Lifecycle
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EWOR provides a detailed timeline, breaking the lifecycle into: Preparation (strategy, 1-2 years), Marketing/Fundraising (pitching LPs, 1-5 years), Capital Commitment & Deployment (initial investments over first 4-6 years of the 10-year clock), Portfolio Management & Follow-on Investments (second half), and Term Extensions & Exits (near the end).
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https://www.ewor.com/blog/vc-fund-mechanics-101-understanding-the-fund-lifecycle ​
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Fund Life Cycles of Venture Capital and Private Equity Funds
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Vestlane outlines the key stages: Fundraising (securing LP commitments), Investment (acquiring portfolio companies, typically 3-5 years), Management (value creation), and Exit (selling companies via IPO/acquisition, often 5-10 years post-investment). It emphasizes the distinct strategies required for each stage. ​
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https://vestlane.com/blog/fund-life-cycle/ ​
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Venture Capital Fund Lifecycle
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10 Leaves focuses on the typical 8-10 year fund term (+ extensions) and structures the lifecycle into three core periods: Fundraising (dealing with qualified investors, placement agents, fund closings), the Investment Period (deploying capital), and the Divestment Period (exiting investments). ​
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https://10leaves.ae/publications/difc/venture-capital-fund-lifecycle ​
Understanding Venture Fund Time Horizons
Gridline addresses the common 10-year duration for VC funds, explaining it allows sufficient time for portfolio companies to mature and achieve an exit (IPO/M&A). It contrasts this with longer PE horizons and discusses the "J-curve" effect where returns are often negative in early years before becoming positive. ​
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https://gridline.co/understanding-venture-fund-time-horizons/ ​
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Fund Management: Understanding Fund Management for Private Funds
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Carta discusses how fund management activities align with the fund lifecycle (often 10+ years). It explains the shift in focus for General Partners (GPs): early years center on raising capital and deployment (deal sourcing, due diligence), while later years emphasize value creation within portfolio companies and executing exit strategies. ​
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https://carta.com/learn/private-funds/management/
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