VC Fund Economics: 37 Key Terms

By Devon Coombs, CPA, MBA · Teaching Professor of Finance, Santa Clara University · Reviewed August 2026

Venture capital fund economics describes how a fund raises, deploys, and returns money, and how its general partners are compensated along the way. Core vocabulary includes the structure of the fund itself as a limited partnership, the mechanics of committed capital, capital calls, and dry powder, and the incentive terms of carried interest, the clawback, and American versus European distribution waterfalls. Performance measures such as DPI reflect how limited partners typically judge results, making this language useful to founders and aspiring investors alike, as introduced in the free Entrepreneurial Finance course.

These terms are taught in Week 7: The VC Industry and Fund Economics of the free Entrepreneurial Finance course; the full course glossary collects every chapter in one place.

American waterfall: A deal-by-deal waterfall in which the GP can earn carry as each investment exits, before the whole fund's capital is returned. GP-friendly.
ASC 820: The fair-value measurement standard governing how funds value illiquid private portfolio companies.
Capital call: A request from the fund to LPs to wire a portion of their commitment, typically with 10 to 14 days notice, as investments are made.
Carried interest (carry): The GP's share of investment profit, typically 20%, paid through the distribution waterfall after capital is returned.
Clawback: A provision requiring the GP to return excess carry if early distributions overpaid it relative to the fund's final performance.
Committed capital: The total capital LPs have promised to the fund. The usual basis for the management fee during the investment period.
Conviction investing: A strategy of fewer, larger investments with higher ownership and deeper engagement per company.
Distribution waterfall: The tiered rules for splitting distributions between LPs and the GP: return of capital, preferred return, GP catch-up, then the carry split.
DPI: Distributions to paid-in. Cash actually returned to LPs per dollar contributed. The realized multiple.; Total Value to Paid-In (TVPI) vs Distributions to Paid-In (DPI)
Dry powder: Committed capital that has not yet been called or invested.
European waterfall: A whole-fund waterfall in which the GP earns carry only after all fund capital, plus any preferred return, is returned. LP-friendly.
Fund (limited partnership): The legal entity that holds LP commitments and makes the investments. Example: a named fund such as Fund XVI, L.P.
Fund of funds: A fund that invests in other VC or PE funds rather than directly in companies, providing diversification and access.
General partner (GP): The entity that manages the fund, makes investment decisions, carries unlimited liability, and receives the carried interest.
GP catch-up: A waterfall tier in which the GP receives most or all distributions until it holds its full carry percentage of the profit distributed.
GP commit: The general partners' own capital invested in the fund, typically 1 to 5%, as an alignment mechanism.
Harvest period: The later years, often years 6 to 10 and beyond, when the fund stops new investing and seeks exits.
ILPA: The Institutional Limited Partners Association, whose reporting templates have become a de facto standard for LP reporting.
Investment period: The early years, often years 1 to 5, when the fund deploys capital into new investments.
J-curve: The path of cumulative net cash to LPs, which dips negative as capital is called and fees are paid, then rises as exits occur.
Leveraged buyout: A private equity acquisition of a controlling stake in a mature company financed largely with debt.
Limited partner (LP): An investor who commits capital to a fund, such as a pension, endowment, fund of funds, or family office. Liability is limited to the commitment.
Management company: The operating business that employs the team and receives the management fee. Legally separate from the GP entity.
Management fee: An annual fee, commonly about 2%, charged on committed capital and later on invested capital, to fund the management company's operations.
MOIC: Multiple on invested capital. A gross multiple of value created on an investment, before fund-level fees and timing.
Paid-in capital: The portion of committed capital that has actually been called and contributed. Also called called capital.; Total Value to Paid-In (TVPI) vs Distributions to Paid-In (DPI)
Performance persistence: The tendency of a GP's fund returns to correlate across successive funds, documented more strongly for VC than buyout.
Power law: A distribution with a long right tail, where a few outliers account for most of the total. Describes VC returns.
Preferred return (hurdle): A minimum return, often about 8%, that LPs receive before the GP earns carry. Common in buyout, far less common in VC.
Reserves: Capital, often 40 to 60% of the fund, set aside for follow-on investments to protect ownership in the best companies.
RVPI: Residual value to paid-in. The remaining portfolio value per dollar contributed. The unrealized multiple.; Total Value to Paid-In (TVPI) vs Distributions to Paid-In (DPI)
Secondary market: A market for buying and selling existing LP fund interests, often at a discount to net asset value.
Section 1061: A Tax Cuts and Jobs Act provision requiring a three-year holding period for carried interest to receive long-term capital gains treatment.
Spray and pray: A strategy of many small investments with lower ownership, maximizing the chance of catching an outlier.
TVPI: Total value to paid-in. The sum of realized and unrealized value per dollar contributed. Equals DPI plus RVPI.; Total Value to Paid-In (TVPI) vs Distributions to Paid-In (DPI)
Vintage year: The year a fund begins investing, used to compare funds raised in the same market environment.
Zombie fund: A fund that lingers in its harvest period collecting reduced fees when the GP cannot raise a successor fund.

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