To outsiders, it looks like reckless risk-taking, opaque dealmaking, and billion-dollar bets on companies that barely exist. To insiders, it is one of the most carefully structured asset classes in the world, engineered around incentives, patience, and asymmetric outcomes.

In our second MVCC workshop, we broke down why venture capital is considered the gold standard of alternative investing. Not because it is easy, but because when done right, the structure itself creates outsized results.

This post walks through the core ideas from the session.

What Does It Actually Mean to Invest in Venture Capital?

At its core, venture capital is about asymmetric returns.

• Your downside is capped. You can only lose what you invest.

• Your upside is theoretically unlimited.

• One breakout company can return an entire fund.

That asymmetry is why venture works at all.

Most startups fail. That is not a flaw in the system. It is the system. VC funds are built to accept a high failure rate in exchange for exposure to extreme winners.

Two defining traits shape everything:

• Information advantage: private markets reward access, judgment, and networks

• Illiquidity: capital is locked up for years, forcing long-term thinking

Together, they create an investment environment unlike anything in public markets.

The Players: LPs and GPs

Venture funds exist to solve a coordination problem.

Limited Partners (LPs)

LPs are the capital providers. Pension funds, endowments, family offices, and long-term institutions.

They:

• Invest at the fund level

• Commit capital for 7 to 10+ years

• Accept illiquidity for diversification and upside

VC behaves differently from public markets. That is exactly why LPs want exposure.

General Partners (GPs)

GPs are the fund managers.

They:

• Design the strategy

• Source and evaluate deals

• Decide how capital is deployed

• Support portfolio companies

LPs supply most of the money. GPs control the decisions. Nearly every rule in venture exists to keep those incentives aligned.

Capital Commitments, Calls, and Deployment

One of the most misunderstood parts of VC: LPs do not send money upfront.

Instead:

• LPs make capital commitments

• GPs issue capital calls when needed

• Capital is deployed over time

The guiding rule is simple:

Every dollar called has a purpose.

Capital flows through a disciplined process:
Sourcing → Diligence → IC approval → Term sheet → Legal close → Wiring

Most funds allocate:

• 70–85% to primary investments

• 10–15% to follow-ons

• ~2% to management fees

• The rest to fund costs

Idle capital is wasted capital.

Portfolio Construction: Failure Is Expected

In venture capital, failure is normal.

Funds are built around:

• High loss ratios

• Follow-on reserves

• Power law returns

A few companies generate most of the value. Everything else is downside management.

That is why VCs hunt for outliers, not “solid” businesses.

The Fund Lifecycle

Most VC funds follow the same arc:

• Years 0–3: Investing

• Years 4–7: Scaling

• Years 8–10: Exits and distributions

VCs do not get paid when they invest. They get paid years later, if exits happen.

That delay enforces discipline.

Venture Scouts: Expanding the Funnel

Deal flow is the lifeblood of venture.

Scouts extend a fund’s reach into communities and networks the core team cannot easily access. Many are students, founders, operators, or domain experts.

Compensation is skewed toward big wins:

• Deal fees

• Deal-specific carry

• Occasionally micro-funds

Scouts only win when they surface major outcomes. That mirrors the incentive structure of the entire industry.

What VCs Actually Get in a Deal

VCs receive more than equity.

They receive structured rights:

• Preferred shares

• Liquidation preferences

• Anti-dilution protection

• Board and information rights

These protect downside. They do not create upside.

Upside comes from ownership and concentration in winners.

What Startups Get Beyond Capital

Founders do not raise VC just for cash.

They gain:

• Networks

• Hiring support

• Customer access

• Fundraising help

• Credibility

• Strategic guidance

Great investors compress learning curves and reduce costly mistakes.

Exits and the Distribution Waterfall

When a company exits, money flows in order:

1. LP capital is returned

2. Preferred returns (if any) are paid

3. Remaining profits are split, usually 80/20

This is governed by the distribution waterfall.

Most VC funds use a European structure, meaning the entire fund must succeed before carry is paid.

GPs only win when LPs win first.

Why VC Is the Gold Standard

Venture capital is not about luck.

It is about structure.

Capital calls, lockups, carry, and waterfalls exist to enforce patience, accountability, and long-term thinking. Over a decade, those incentives compound.

That is why VC remains one of the most powerful and misunderstood asset classes in finance.

Workshop Slides

If you missed the session or want to revisit the material, you can find the full slide deck below.

Fund Structures And Incentives Workshop Slide Deck

2.32MB ∙ PDF file

Download

Download

Not because they aren’t good - but because there is a gap.

A gap between ambition and conviction.
A gap between students and real founders.
A gap between creativity and capital.

The McMaster Venture Capital Club (MVCC) exists to bridge that gap.

Our mission is simple:
Give students hands-on experience in how startups are built, funded, and scaled.

We don’t teach venture capital through lectures — we learn by working directly with real founders, helping early-stage startups solve real problems.

This means:

• You learn how investors evaluate companies.

• You learn how founders make strategic decisions.

• And you contribute to real-world outcomes — not hypotheticals.

Our broader purpose is to help McMaster become a recognized hub of entrepreneurial talent - where ideas don’t just exist, they thrive.

How Venture Capital Works (The Core Concept)

If you’ve ever watched Shark Tank, you already get the basic idea.
But real venture capital operates differently.

Startups don’t go to banks for loans. Instead, they raise capital in funding rounds, each designed to support a different stage of growth:

Pre-Seed:
The idea stage. Founders are building an early prototype and validating the problem. Typical funding is $10K – $250K.

Seed:
The product is being tested with real users to prove product-market fit. Typical funding is $250K – $2M.

Series A:
The company is now scaling — growing the team, acquiring more customers, and building repeatable processes. Typical funding is $2M – $15M.

Series B & C:
The company expands into new markets, product lines, or regions. Operations and growth efforts become significantly larger. Typical funding is $15M – $50M+.

Late-Stage / Pre-IPO:
The company focuses on efficiency, profitability, and readiness for public markets or acquisition. Funding at this stage is typically $50M+.

The Lead Investor

In almost every round, one investor takes the lead.
This investor:

• Sets the valuation

• Negotiates the deal

• Takes the biggest early risk

Once they commit, co-investors follow.
Think of it like a group project — one person does most of the heavy lifting, others support.

Unicorns + Decacorns

A unicorn is a private startup valued at $1B+.
A decacorn is valued at $10B+.

Once a company goes public, it stops being a unicorn — because its value is now set by the open market.

Why does venture capital chase unicorns?

Because one unicorn can make up for dozens of failed investments.

Example:
In 2009, Sequoia Capital invested $585K into Airbnb.
By the time Airbnb went public in 2020, that investment was worth ~$12B.

That’s why venture capital is about conviction before consensus.

Where Most Startups Fail: The Early Stage

This is where founders are still validating:

• the product

• the market

• the business model

And this is where ~90% of startups fail, often because:

• They never find product-market fit

• They burn cash too quickly

• Their unit economics are unsustainable

Support Systems

To help founders navigate this stage, incubators and accelerators exist.

At McMaster:

• The Forge - workspace, funding, investor network

• The Clinic - turns research + innovation into companies

Globally:

• Y Combinator (YC) and Techstars have launched companies now worth $600B+
  Airbnb, Stripe, Coinbase, Reddit? All YC companies.

MVCC will be hosting YC-backed founders this year — stay tuned.

Who Invests at Each Stage

Pre-Seed / Seed:
Investors at this stage are usually angel investors, incubators/accelerators, and micro-VC funds. They are comfortable with high uncertainty and are primarily betting on the founders.

Seed → Series B:
This is where early-stage venture capital funds invest. They look for signs of product-market fit and early growth.

Late Stage:
When a company is more mature, investment often comes from crossover funds, private equity firms, and sovereign wealth funds. These investors focus more on scale, financial performance, and path to exit.

Liquidity

Liquidity is the measure of how easily an asset can be converted to cash.
Unlike stocks, venture capital is illiquid.
When VCs invest, their money is locked up for 7–10 years, until an exit (IPO or acquisition).

Late-Stage VC, IPOs & Secondary Markets

Once a company has strong revenue + market traction, the focus shifts from risk to scale.

This is where:

• Crossover Investors (hedge funds entering private markets)

• Large VC Funds

• Private Equity Firms

start writing checks of $50M+.

Example:
Tiger Global invested heavily in Stripe & Databricks before IPO.

IPOs

An initial public offering (IPO) is when a private company offers its shares to the public.
This is how early investors and employees finally get liquidity.

Example:
Reddit IPO’d in 2024 at a $6.5B valuation, raising ~$750M.

Secondary Markets

Private shares can also be bought/sold before IPO.
This is how Sequoia sold part of its Stripe position for ~$860M - without waiting for IPO.

Private Equity Roll-Ups

Private equity firms often buy multiple companies in the same sector and merge them to build scale.

Example:
Blackstone rolled up dozens of healthcare service companies into one platform valued at $10B+.

Pre-Money vs. Post-Money Valuation

Formula:
Pre-Money Valuation + Investment = Post-Money Valuation

Example:
Startup valued at $500K
Sequoia invests $200K

→ Post-money valuation = $700K

Famous Canadian Growth Paths

Shopify

• Bootstrapped for 4 years (no outside capital)

• Series A (2010): $7M led by Bessemer at a $20M pre-money valuation

• Series B (2011): $15M

• Series C (2013): $100M (OMERS + Insight)

• Hit $1B valuation in 2013 → became a unicorn

• IPO’d in 2015 at $17/share → closed at $28/share opening day

Wealthsimple

• Series E (2025): $750M CAD led by Dragoneer & GIC

• Valuation exceeded $10B+ → became a decacorn

How Venture Funds Are Structured

VC funds are Limited Partnerships:

RoleFunctionLPs (Limited Partners)Provide capital (pension funds, endowments, family offices, high-net-worth individuals)GPs (General Partners)Invest capital, work with founders, drive returns

VC Compensation

• 2% management fee

• 20% performance fee (carry)

Fund Lifecycle (~10 Years)

1. Invest (Years 1–4)

2. Support & Scale (Years 4–8)

3. Exit (Years 8–10)

Key Metrics VCs Analyze

Product-Market Fit (PMF):
Measures whether customers genuinely need and consistently use the product.
It matters because PMF is the strongest predictor of whether the company can grow quickly and sustainably.

TAM (Total Addressable Market):
Represents the total size of the market opportunity if the company captures most of its ideal audience.
It matters because a larger TAM means more potential upside and scalability.

Unit Economics:
Looks at how much profit (or loss) the company makes per customer or per transaction.
It matters because it shows whether the business can become financially sustainable as it grows.

Burn Rate:
The amount of money the company spends each month.
It matters because burn rate determines runway — how long the startup can operate before needing to raise more funding.

Valuation Methods

1. Market Comparables - value based on similar companies.

2. Exit-Based Valuation - value based on expected exit return.

3. Revenue Multiple Method - valuation = revenue × industry multiple.

4. Scorecard / Risk Factor Method - used for pre-revenue startups; adjusts valuation based on strengths/risks.

Closing Thought

Venture capital is not about predicting the future - it’s about betting on it.

At MVCC, we’re learning to think like founders and investors - not someday, but now.