Understanding Venture Fund Structure
A comprehensive explanation of venture fund types, capital structure, the role of the Fund of Funds (KVIC), and profit distribution mechanisms.
Understanding Venture Fund Structure
What Is a Venture Fund?
A Venture Fund is a collective investment vehicle in which a VC (GPGeneral Partner / Limited Partner
GP (General Partner) manages the fund; LP (Limited Partner) provides capital as an investor.) manages pooled capital raised from multiple investors (LPs) to invest in venture enterprises. In Korea, they are primarily formed as startup investment associations (창업투자조합) or Korea venture investment associations (한국벤처투자조합).
A fund exists for a fixed period (usually 7–10 years), during which it executes investments, manages the portfolio, and carries out EXITs, then distributes returns to LPs before dissolving.
Types of Venture Funds
1. Startup Investment Association (Most Common)
- Legal basis: Act on the Promotion of Venture Investment
- Formation requirements: Committed capital of KRW 1 billion or more; participation by a GP (venture investment company) is mandatory
- Tax benefits: Individual LP investors may claim income deductionsIncome Tax Deduction
Tax deduction system for venture enterprise investment: 100% for up to 30M KRW, 70% for 30-50M KRW, 30% for over 50M KRW. (Article 16 of the Restriction of Special Taxation Act) - Operational restrictions: Must comply with mandatory investment ratio requirements for venture enterprises, etc.
2. Korea Venture Investment Association
- Legal basis: Act on the Promotion of Venture Investment
- Feature: Sub-fund invested in by KVIC's Fund of FundsFund of Funds (FoF)
Government fund-of-funds operated by KVIC. Invests in individual VC funds as a parent fund. - Structure: Fund of Funds → Sub-fund (VC) → Venture enterprise
3. New Technology Business Investment Association
- Legal basis: Specialized Credit Finance Business Act
- Operating entity: New Technology Business Finance Company (신기사)
- Feature: Higher proportion of growth and late-stage investments compared to early-stage
4. Investment Company Type (Private Equity Fund)
- Legal basis: Financial Investment Services and Capital Markets Act
- Form: Private collective investment vehicle (PEF structure)
- Feature: Large-scale, centered on institutional investors
- Difference from startup investment association: Subject to corporate tax; different decision-making structure
5. Individual Investment Association
- Formation size: KRW 100 million or more
- Members: Up to 49 individual investors (including the GP)
- Advantages: Simple to form and small-scale operation is possible
- Tax benefits: Income deduction on capital contributions (Article 16 of the Restriction of Special Taxation Act)
- Caution: Must verify qualifying criteria for investee companies
The Role of the Fund of Funds (KVIC)
Fund of Funds Overview
The Fund of Funds managed by Korea Venture Investment Corp. (KVIC)Korea Venture Investment Corp. (KVIC)
Government fund-of-funds operator. A key capital source for the venture investment ecosystem. is the cornerstone of Korea's venture investment ecosystem. Established in 2005 with government capital, it has played the role of expanding venture investment funds by investing in private VC funds.
Legal basis: Article 37 of the Act on the Promotion of Venture Investment AUM: Cumulative committed capital of approximately KRW 6 trillion or more (as of 2025) Sub-funds: Supported the formation of over 1,000 sub-funds cumulatively
How the Fund of Funds Invests
The Fund of Funds does not invest directly in startups — it invests in sub-funds formed by VC managers (GPs).
Government fiscal resources (Ministry of SMEs and Startups, Ministry of Culture, Ministry of Agriculture, etc.)
↓ Commit capital
Fund of Funds (managed by KVIC)
↓ Sub-fund commitment (up to 50–60% matching)
Startup Investment Association (managed by VC GP)
↓ Investment
Venture enterprise (portfolio)
Features of Fund of Funds Investment
Separate accounts by policy purpose: The Fund of Funds receives capital from multiple government ministries and manages it separately according to its intended purpose.
| Account | Primary Contributor | Investment Focus |
|---|---|---|
| Ministry of SMEs and Startups account | MoSS | General venture, startups |
| Culture account | Ministry of Culture | Content, cultural industry |
| Agriculture & Food account | Ministry of Agriculture | Agricultural technology, food tech |
| Film account | Ministry of Culture | Film and broadcasting |
| Maritime & Fisheries account | Ministry of Oceans and Fisheries | Marine technology |
| Tourism account | Ministry of Culture | Tourism industry |
Matching ratios: - Fund of Funds commitment ratio: 30–60% of total fund size - Private LP matching: 40–70% - Example: For a KRW 30 billion fund, Fund of Funds contributes KRW 15 billion + private sector KRW 15 billion
Sub-fund Public Offering Process
For a VC manager to receive Fund of Funds investment: 1. Check public offering announcements from KVIC (announced quarterly) 2. Submit a proposal (investment strategy, GP capabilities, LP fundraising plan) 3. Screening and selection (manager capabilities, return track record, investment strategy fit) 4. Execute agreement and form sub-fund 5. Deploy investments and fulfill reporting obligations
Capital Structure in Detail
Typical Fund Capital Structure Example
KRW 20 billion venture fund (IT/AI-specialized):
| LP Type | Commitment | Percentage |
|---|---|---|
| Fund of Funds (KVIC) | KRW 10 billion | 50% |
| National Pension Service | KRW 4 billion | 20% |
| Korea Scientists and Engineers Mutual Aid Association | KRW 2 billion | 10% |
| Private corporation (CVC) | KRW 2 billion | 10% |
| High-net-worth individual | KRW 1 billion | 5% |
| GP co-investment | KRW 1 billion | 5% |
| Total | KRW 20 billion | 100% |
Importance of GP co-investment: When a GP invests directly in the fund, it aligns their interests with those of LPs, instilling confidence. Typically, the GP contributes 1–5% of the total fund.
LP Type Characteristics
Institutional investors: - Public pension funds such as the National Pension Service, Government Employees Pension Service, and Teachers' Pension - Mutual aid associations such as the Korea Teachers Mutual Aid Association and Korea Scientists and Engineers Mutual Aid Association - Financial institutions such as insurance companies and banks - Large-scale long-term investments; require stable returns - Quarterly and annual reporting obligations
Government / public sector: - Fund of Funds (KVIC) - Local government venture funds - Required to achieve policy goals (investment obligation ratios, regional investment, etc.)
Private corporations: - Corporate venture capital (CVC) approach - Strategic objectives (business synergies, technology acquisition) - Pursuit of strategic returns in addition to financial returns
Individual investors: - High-net-worth individuals, angel investors - Income deduction benefits (100% deduction on amounts up to KRW 50 million per year) - Small-scale participation, higher risk
Fund Operating Period
Typical Fund Lifespan
From formation to dissolution, a venture fund typically takes 7–10 years.
| Phase | Period | Key Activities |
|---|---|---|
| Investment Period | Years 1–3 | Deploy new investments |
| Management Period | Years 4–6 | Portfolio management, follow-on investments |
| Harvest Period | Years 7–10 | Execute EXITs, distribute returns |
Possibility of extension: Depending on market conditions, funds may be extended by 1–2 years with LP consent. In particular, when the IPO market is depressed, EXITs are delayed and the fund period lengthens.
Profit Distribution Structure
Basic Principle: Waterfall Structure
Fund profits are distributed in a fixed order.
Stage 1: Return of Principal When investment returns are generated, LP capital contributions are first returned in full.
Stage 2: Reaching the Hurdle Rate After returning principal, the amount corresponding to the agreed minimum return rate (hurdle rate, usually 7–8% per annum) is paid to LPs preferentially.
Stage 3: Catch-up A certain proportion of returns exceeding the hurdle rate is first received by the GP to bring the carried interest up to the agreed level.
Stage 4: Carried Interest Final excess returns are distributed 80% to LPs and 20% to the GP.
Understanding Profit Distribution Through an Example
Assuming a KRW 10 billion fund with final proceeds of KRW 18 billion:
| Stage | Distribution | LP | GP |
|---|---|---|---|
| Return of Principal | Full KRW 10 billion | KRW 10 billion | 0 |
| Hurdle Rate (8%) | KRW 0.8 billion × 7 years ≈ KRW 5.6 billion | KRW 5.6 billion | 0 |
| Carried Interest | Excess KRW 2.4 billion × 20% | KRW 1.92 billion | KRW 0.48 billion |
| Total | KRW 18 billion | KRW 17.52 billion | KRW 0.48 billion |
※ Actual calculations are more complex, with many variables including annual cash flows, distribution timing, etc.
Management Fee
Separate from carried interest, the GP receives an annual management fee for fund operations.
- Calculation basis: 1.5–2.5% per annum of committed capital
- Payment timing: Quarterly or semi-annually
- Purpose: To cover GP operating costs including personnel and office expenses
- Example: KRW 20 billion fund with 2% management fee → KRW 400 million per year
Characteristics by Fund Size
Small Fund (KRW 10 billion or less)
- Investment focus: Seed to Pre-Series A
- Portfolio: 10–20 companies
- Feature: Close relationships with founders, more time invested
- Limitations: Limited follow-on investment capacity, lower EXITExit
The process by which investors recover their investment through IPO, M&A, or secondary sale. correlation
Mid-size Fund (KRW 10–50 billion)
- Investment focus: Series A to B
- Portfolio: 15–30 companies
- Feature: Balanced portfolio, capable of lead investments
- Limitations: Requires a differentiation strategy
Large Fund (KRW 50 billion or more)
- Investment focus: Series B to growth stage
- Portfolio: 20–50 companies
- Feature: Lead rounds, board influence
- Limitations: Difficulty investing in early-stage companies (deal size mismatch)
Mandatory Investment Ratios and Regulations
Startup investment associations must comply with statutory mandatory investment ratios.
Key investment obligations (based on Enforcement Decree of the Venture Investment Promotion Act): - Mandatory investment ratio in venture enterprises, etc.: 40% or more of the association's committed capital - Mandatory ratio for companies within 7 years of founding: Varies by account - Regional investment obligation: Compliance with investment ratio for companies in the relevant region (for regional accounts)
Failure to comply may result in sanctions such as recovery of Fund of Funds capital and cancellation of registration.
Closing
Understanding the structure of venture funds allows you to better grasp the decision-making mechanisms of investors during the fundraising process. VCs operate under various constraints including the fund's operating period, mandatory investment ratios, and pressure to realize returns. From a founder's perspective, understanding which stage of fund a VC is managing and how much of the investment period remains gives you an advantageous position in negotiations.
Korea's venture fund ecosystem has developed through a public-private cooperation structure centered on the Fund of Funds, and as of 2025, the total management scale has exceeded KRW 100 trillion, building a mature ecosystem at the top of the Asian rankings.