How Money Actually Flows From VCs to Startups

Capital call lines of credit are the instrument that allows VCs to manage their operations and administration.

When a venture capital (VC) firm announces the close of a new fund, it doesn’t mean that the firm suddenly has millions of dollars sitting in its bank account. Instead, the fundraising comprises a series of commitments from limited partners (LPs) to inject their promised capital over the life of the fund.

Typically, VCs “call capital” from LPs over the life of the fund, depending on cash flow needs—like new investments or follow-on funding. But not every capital call is smooth or expedient; sometimes LPs delay or, in rarer cases, even rescind a wire after it has been sent. Issues like these, regardless of cause, can lead to a liquidity problem in the venture capital ecosystem that harms startups and slows innovation.

The result is an administratively complex process that many managing partners would prefer to conduct at their own pace. One mechanism VC firms use to manage cash flow and ease the work of collecting from LPs is a capital call line of credit—also called a capital call facility—a specialized debt instrument made explicitly for VC liquidity.

Speaking with BetaKit, Robert Rosen, Managing Director of Innovation Banking at CIBC, explained what capital call lines are, how they operate, and how liquidity instruments like these help keep Canada’s innovation economy moving.

Read more: How Money Actually Flows From VCs to Startups, Opens in a new window (link is English only)