Venture capital (VC) is an integral part of the quantum tech ecosystem, so I thought it would be fun to do a bit of a dive into the mechanics of VC. I used to think of VCs as this mysterious group of people, who existed to give you money, if only you managed to impress them somehow. My guess is that other academics, who haven’t actively looked into what VCs do, might feel a similar way.
As scientists, we're actually already used to mysterious groups of people who give us money. But I think the difference is that if you're an academic, surrounded by other academics, you can get quite far just by absorbing, through osmosis, best practices for grant writing.
The VC world is different to the world of government grants, and if you're a scientist considering entrepreneurship, you won't have years to spend in a like-minded community to internalize how to do things. You’ll need to get out there into the world, talk to people, and learn from them. A basic grasp of the mechanics of VC will give you a framework to make sense of what you’ll learn in those conversations (it might also make interpreting the quantum technology news easier!).
This basic framework is what we'll be looking at here.
What is a VC fund?
At the most basic level, a VC fund is a pool of money raised from outside investors. These outside investors might be pension funds, university endowments, state-owned investments funds, high-net-worth individuals, etc. Their goal is to get high returns, better than they could get in public markets like stocks and bonds.
In return for those high returns, the investors are happy to accept higher risk and to have their money locked away for a long period of time (several years, even over a decade). The investors who invest in a VC fund are usually called Limited Partners, or LPs for short.
The fund is usually managed by another group of people. These fund managers decide which companies to invest in, they sit on the boards of those companies, and eventually guide when and how to get money out of those companies and back into the fund, and ultimately, to the investors. These managers are usually called General Partners (GPs) or managing directors.
(Most) VC funds don't last for ever
When a group of GPs raises money for a fund, they make a deal with the LPs that the money will only be tied up for a set period of time.
Most venture capital funds have a 10 year term (9% are < 10yr, 72% are 10yr, and 19% are >10yr. While the term sets a fund’s intended lifespan, funds can have the ability to extend their term. The median fund liquidation time is now slightly over 14 years. According to recent data from Silicon Valley Bank, top-performing US VC funds now often take between 16 to 20 years to fully return capital to investors. One of the longest funds I've come across is Bill Gates' Breakthrough Energy Ventures, which has a 20 year term.
The fact that investors want to cash out within e.g. 10 years, makes VCs prefer companies with timelines shorter than that. That’s obviously a problem for deep-tech ventures with longer R&D cycles.
Incidentally, when I found these numbers, I was surprised that they didn’t really line up with what I typically hear, which is that software funds tend to have 5-7 year terms and deep tech funds tend to have 10-15 year terms. This is something I plan to dig into further for a future article.
There is also something called an evergreen fund, e.g. the Mars IAF, which doesn’t have a fixed term. I don’t know how prevalent these are, but I’ll also dig into it more in a future article.
VC fund life cycles
For the sake of illustration, let’s take a look at a typical lifecycle for a 10 year fund. These stages may overlap significantly, but can roughly be broken down into:
Fundraising (~Year 0–1)
GPs raise commitments from LPs. In this phase, GPs present an investment thesis (e.g., “AI-first enterprise SaaS,” or “early stage quantum technologies”), which is how funds differentiate themselves and signal their expertise to attract LPs who want exposure to specific sectors or different phases of a company's development. LPs commit some total amount of money, which they will transfer to the fund in chunks over the next few years.
Investment period (~Year 1–5)
GPs identify and invest in startups. As they pick companies to invest in, they're aiming for a set number, across different stages, with diversification by sector or risk profile. This investment period can last anywhere from 3 to 5 years, but often starts as soon as the GPs have raised enough committed capital to begin operations.
Portfolio management (~Year 3–10)
GPs start managing portfolio companies immediately after investing in them. They support companies through board seats, introductions, and follow-on investments. They also make internal decisions about which companies to double down on, and which companies to devote less to, in terms of resources.
Harvest/exit (~Year 5–10+)
GPs focus on “exiting” remaining portfolio companies to return capital to LPs. Returns are realized through acquisitions, IPOs, or secondary sales. Some funds can get 1-2 year extensions if they have promising companies that need more time to mature before exit, extending the harvest period.
For a more detailed breakdown of the various stages, check out this resource.
What's an exit?
When the time comes, GPs need to turn the investments in a certain company back into cash or liquid shares and distribute them to the LPs. That moment is called an exit.
Exits can take several forms:
In an acquisition, another company buys the startup outright, either for strategic technology, market position, or talent. This is the most common type of exit. In quantum tech, this route was taken by QuantumWise → Synopsys (2017), QxBranch → Rigetti (2019), Zurich Instruments → Rohde & Schwarz (2021), Quantum Benchmark → Keysight (2021), Entangled Networks → IonQ (2023), Oxford Ionics → IonQ (2025), and Lightsynq → IonQ (2025).
In an IPO (Initial Public Offering), a company lists directly on a stock exchange through the traditional IPO process. This involves extensive regulatory review and financial disclosure. For VCs, it provides liquidity because shares can be sold into public markets. One example in quantum is QuantumCTek who went public on the Shanghai Stock Exchange STAR Market in 2020.
SPACs and reverse takeovers are alternative routes to going public without a traditional IPO. In a SPAC (Special Purpose Acquisition Company) a private company merges with a publicly listed shell created to raise cash for such a deal. This was the route taken by IonQ (2021), Rigetti (2022), D-Wave (2022), and Zapata (2024). Horizon Quantum and Infleqtion also recently announced their SPAC plans. In a reverse takeover, a private company merges with an already listed firm that is not a shell.
Instead of waiting for an acquisition or IPO, a VC may sell its shares privately to another investor, such as a later-stage fund. This is known as a secondary sale. These transactions can provide partial liquidity before a company reaches a full exit. Interestingly, these kinds of sales are becoming more common, being up by 41% from the first half of 2024, with the introduction of new structures like Special Purpose Vehicles (SPVs).
Is every ending an exit?
Unfortunately, no. Companies can also come to an end in ways that don’t give investors their money back. These can also take several forms:
A shutdown is when a company stops operating altogether and closes down. In this case, investors don’t receive any payout and their equity is no longer worth anything. An example is Nordic Quantum Computing Group, which wound down in 2024, although they were not being managed by a VC firm at the time.
You can also have mergers without payout, where two companies combine for strategic reasons, but no money changes hands. Rather than cashing out, investors’ shares roll over into the new entity. This happened when Cambridge Quantum merged with Honeywell Quantum Solutions to form Quantinuum in 2021.
A company can also go quiet without officially shutting down, sometimes referred to as going dormant. Operations may stall, staff may leave, and new funding may dry up, but the legal entity lingers. Investors technically still hold equity, but there’s no realistic way to get their money back.
As a side note, you may have heard about Zapata shutting down. This happened after their SPAC IPO, so it wouldn’t have affected the VCs. Incidentally, it seems that Zapata is on their way to a restructuring, so it might not be the end of the story for them.
How to know if a fund is going well?
There are several metrics that LPs and GPs use to track performance. Two of the most basic are the multiple on invested capital (MOIC) and the internal rate of return (IRR), but there are several others as well.
The MOIC is a simple ratio of how many times the fund’s invested money has been multiplied. For example, a 3x MOIC means the fund has returned three dollars for every dollar invested.
The IRR is an annualized measure of the return which gives a better sense of the funds performance than the MOIC. Obviously a 3x return in five years is better (higher IRR) than the same 3x stretched over fifteen.
For deep tech, long R&D cycles make it harder to deliver the quick returns that drive a high IRR. This is another thing that specialized deep tech firms would be more understanding of.
Who you’ll meet at a VC firm
General Partners aren’t the only people you’ll encounter when dealing with a VC. Firms have layered teams, which might look different depending on the firm, but usually look something like the following.
At the top are the GPs, who raise money and make final investment decisions. They typically reach that level by founding their own fund, being a successful entrepreneur first, or climbing the ranks internally.
Below them are principals or VPs, who oversee daily deal flow and diligence and usually have several years of venture or operating experience.
Associates and analysts sit at the bottom rung, ranging from recent graduates to MBAs. They handle due diligence (research, market maps, memos) and sourcing (finding startups through networks, programs, or scouting online).
For a deeper dive, check out this resource.
Don’t forget, VCs are people too!
This should be kind-of obvious, but it’s worth mentioning in a “framework” article like this one. Sometimes it’s too easy to think of a group of people that you’re unfamiliar with as being a bit homogenous. But, like in many industries, people end up in venture capital from many different backgrounds: finance, economics, business, academia, etc.
Some have been in VC for a long time, while others are early in their careers and still figuring it out. Some genuinely love what they do, while others are burnt out and having a bad time. Like the rest of us, they have different life experiences and biases, and personal lives that influence their mood on any given day.
This means you can’t rely on an article like this to tell you what VCs are like and how to make an impression on them. You have to build your own picture over time by talking to lots of people, including the VCs and investors themselves as well as other founders who have pitched to them.
I really like Derek Sivers’ echolocation metaphor for what I mean here. You need to have conversations, sending out questions and ideas, and learn from the echoes that come back. Hopefully the framework in this article will help you make better sense of those echoes.
If you liked this post, feel free to click the 🧡 button here on Substack, or on the LinkedIn, Bluesky, or X post that brought you here. That way, more people can discover it. Thanks!
At Quantum Salon, we help deep tech teams explain what they’re building and why it matters. If you’re building something cool, drop us a line!