Venture capital (VC) is a type of investment where investors provide funding to startup companies with high potential for growth. The investors, also known as venture capitalists, provide the startup with financial and strategic support in exchange for a share of the company’s ownership. In addition to owning a stake in the company, venture capitalists may also receive a portion of the profits earned by the company through what is known as a “carry.”
Carry, also known as carried interest, is a profit-sharing mechanism in which the venture capitalist receives a percentage of the profits earned by the startup. Typically, this percentage is around 20%, although it can vary depending on the agreement between the venture capitalist and the startup.
Carry is a crucial component of venture capital investing because it aligns the interests of the venture capitalist with those of the startup. When the startup performs well and earns a profit, the venture capitalist also earns a profit. This incentivizes the venture capitalist to provide the startup with the support it needs to succeed, such as funding, guidance, and access to networks.
In the context of venture capital, the carry is the portion of the profits earned by the startup that are "carried" by the venture capitalist. It is called "carry" because it is the amount that the venture capitalist carries with them as their share of the profits, after the startup has achieved a certain level of return on the investment.
In conclusion, venture capital carry is a profit-sharing mechanism that aligns the interests of the venture capitalist and the startup. It incentivizes the venture capitalist to provide the startup with the support it needs to succeed and is a crucial component of venture capital investing. Venture capital carry also helps to ensure that the venture capitalist is only rewarded if the startup is successful, which is beneficial for both parties involved.