In venture capital (VC), a "capital call" aka "draw down" refers to the process by which a VC fund manager requests additional capital from the limited partners (LPs) of the fund. When a VC fund is formed, investors commit a certain amount of capital to the fund, but they don't contribute the entire amount upfront. Instead, the fund manager issues capital calls as needed, requesting investors to fulfil their commitment and contribute additional funds when there are investment opportunities or operational needs.
Key points on a capital call:
- Timing: Capital calls or draw downs occur when the VC fund manager identifies promising investment opportunities or when the fund requires additional capital for operational expenses.
- Investor Commitments: Limited partners commit to providing a certain amount of capital to the fund when they initially invest. Capital calls are a mechanism to fulfill these commitments.
- Notification: Fund managers typically notify investors in advance of a capital call, providing details about the purpose, amount, and timing of the requested contribution.
- Flexibility: Capital calls offer flexibility to VC funds, allowing them to deploy capital strategically when attractive investment opportunities arise without having to hold excessive amounts of uninvested capital.
- Investor Obligation: Limited partners are obligated to respond to a capital call by contributing the specified amount within the designated timeframe. Failure to meet a capital call may result in consequences outlined in the fund agreement.
It's important to note that the specific terms and conditions related to capital calls are outlined in the fund's legal documents, such as the Limited Partnership Agreement (LPA). These documents define the rights and obligations of the limited partners and the fund manager, including the procedures for issuing and responding to capital calls.
