Inside the VC Machine: Roles, Incentives, and What They Mean for You
Founders pitch, checks are written, and companies scale—but what happens behind the scenes? Understanding a VC fund’s structure reveals how decisions are made and how incentives drive behavior. Here’s a quick breakdown of the key roles and what motivates them.
1. Analysts
Role: The entry-level position in a VC fund, analysts are typically tasked with market research, financial modeling, and supporting deal flow. They spend their time sifting through startup pitches and performing due diligence on potential investments. Some funds will omit this role entirely, and have associates as their most junior team members.
Incentives: Analysts are generally salaried employees with little (if any) carry—the share of profits when a fund has a successful exit. Their primary incentive is career progression, using this role as a stepping stone to higher positions in venture, startups or commonly, to top MBA programs.
2. Associates
Associates often handle a larger portion of the due diligence process and may begin developing relationships with founders. Some associates source deals but do not make investment decisions independently. Primarily, they write investment memos to present to more senior members of the team. They may also sit on boards as observers, assist with board materials, or provide ad-hoc support to portfolio companies.
Incentives: Like analysts, associates are salaried and may receive a modest bonus. At this level, carry is still minimal. The real incentive lies in building a network and demonstrating their ability to identify promising startups, perform thorough due diligence, and write sharp, well-executed memos aligned with the fund’s thesis—ultimately setting the stage for a promotion to more senior roles.
3. Principals
Role: Principals are considered the mid-tier leaders of a fund. They actively source deals, negotiate term sheets, and often sit on boards post-investment. This is the proving ground for future partners, should their fund offer a partner track.
Incentives: Principals typically receive a higher salary and meaningful carry in the fund. Their incentives are directly tied to identifying and nurturing portfolio companies that can generate strong returns.
4. Partner / General Partner (GP)
Role: Partners and General Partners are the decision-makers in the fund. They manage relationships with limited partners (LPs), oversee the fund’s strategy, and have the final say on investments and sit on the investment committee.
Incentives: GPs have the most significant carry in the fund, as well as a high salary. Since they invest their own capital in the fund (referred to as the GP commit,), they have strong financial incentives to ensure the fund performs. GPs’ reputations are tied to the success of their investments, so their long-term incentive is to raise subsequent funds by delivering exceptional returns to LPs.
5. Limited Partners (LP)
Role: Limited Partners are the investors in a venture capital fund. They provide the capital that the General Partners use to invest in startups. LPs can be a mix of institutional investors (e.g., pension funds, endowments, family offices, sovereign wealth funds) and high-net-worth individuals. While LPs don’t participate in day-to-day operations or investment decisions, they are critical stakeholders in the fund’s performance.
Incentives: LPs are primarily focused on achieving strong financial returns relative to their risk. They expect GPs to invest their capital wisely and generate outsized returns compared to other asset classes. For LPs, the long-term incentive is often diversifying their portfolios and gaining exposure to high-growth opportunities in the private market.
Why It Matters:
When raising capital, knowing your audience is extremely important. While an associate may often take the first call with founders, it’s important to understand that the decision to invest (or not to invest) isn’t theirs alone. That’s not to say engaging in conversations with junior team members isn’t worthwhile—quite the contrary. It’s often a great foot in the door and the first step toward receiving a term sheet.
What this does mean is tempering expectations based on who you engage with, especially when speaking with multiple funds, as any prudent founder should during their fundraising process. At the end of the day, incentives at a fund are generally aligned, and everyone is focused on the same goal: creating relationships with exceptional founders who are building scalable businesses with the potential to generate outsized returns for the fund and its partners. This shared incentive is what unites the entire team.