How VC Funds Actually Work (and Why Your Deal Is Structured This Way)
From the outside, venture capital behavior can appear inconsistent.
One investor pushes valuation but tightens governance.
Another moves quickly but insists on structure.
A third sounds patient—until suddenly they are not.
These shifts are often attributed to personalities or negotiation style. In reality, they are structural. Venture capital firms behave the way they do because of how venture funds are built, governed, and judged.
To understand why your deal looks the way it does, you have to step back from the term sheet and look at the fund behind it.
Why do VC term sheets look the way they do?
Because venture capital firms operate under fixed fund timelines, portfolio return targets, and fiduciary duties to limited partners—not because of founder-specific preferences.
A VC Firm Is Not a Person
A venture capital firm does not invest its own money. It manages a pooled vehicle on behalf of limited partners—pension funds, endowments, family offices, and sovereign wealth funds—under a fixed set of contractual obligations.
Those obligations shape behavior long before your company enters the picture.
Every term sheet reflects not just an investor’s view of your business, but the constraints of the fund they are deploying from. The relevant unit of analysis is not your company. It is the portfolio.
Funds Are Judged on Portfolios, Not Individual Wins
Venture capital follows a power-law distribution. Most investments return little or nothing. A small number must generate outsized returns to carry the fund.
As a result:
- individual deals are evaluated as inputs into a broader return profile,
- downside outcomes matter as much as upside narratives,
- and structure is used to manage variance across the portfolio.
This is why investors focus on payout priority, control rights, and follow-on optionality even when they are enthusiastic about your company. The fund cannot rely on optimism. It has to survive distribution math.
The Fund Has a Clock
Most venture funds have a ten-year legal life, with an initial investment period followed by a harvest phase. Extensions exist, but they are neither automatic nor free.
This creates two pressures:
- deployment pressure early in the fund’s life,
- liquidity pressure later on.
The same company, presenting the same opportunity, may encounter very different behavior depending on where the fund sits in that cycle. Speed, patience, flexibility, and insistence on control often track fund age more closely than founder performance.
Your timeline is not the fund’s timeline.
“Market Terms” Are Risk Management Tools
Founders are often told that certain provisions are “standard.” This is usually interpreted as inertia or conservatism.
In practice, standardization serves a different purpose: risk containment.
Deviating from established structures increases internal friction within the firm and external risk with limited partners. When an investor accepts non-standard economics or control, they must justify that decision internally and often compensate elsewhere.
This is why price may move when structure does not—or vice versa. Flexibility is not evenly distributed across all terms.
Why This Shows Up in Your Term Sheet
When these fund-level realities surface in negotiations, they often look like:
- insistence on specific economic protections,
- early attention to governance and veto rights,
- sensitivity to timing and process control,
- resistance to revisiting “settled” structural points.
These are not signals of distrust. They are artifacts of fiduciary duty.
The fund is not optimizing for your outcome alone. It is optimizing for survivability across uncertainty.
What This Is Not About
This is not an argument that investors are inflexible.
It is not a claim that founders lack leverage.
It is not advice on how to negotiate.
It is an explanation of why the same firm can behave differently across deals—and why those differences are often predictable.
Implications
Once you understand how funds work, negotiation becomes easier to interpret.
You stop attributing meaning to tone.
You stop mistaking enthusiasm for flexibility.
And you start recognizing which parts of the deal are structural rather than situational.
Your term sheet is not just an offer.
It is a reflection of a system designed to manage risk over time.
Series Bridge
If venture funds are designed around portfolio returns and fixed timelines, the next question is how those constraints surface at the moment of agreement—when terms are actually set.
That requires deconstructing the term sheet itself.
Venture capital decisions are constrained long before they reach your inbox.
→ Next in the series: Why Alignment Is Conditional (and Breaks Before You Expect It)