A capital call is a request made by a venture capital fund to its investors to contribute capital to the fund. This is typically done when the fund needs additional funds to make investments or to cover its ongoing expenses. Capital Calls are commonly paid by the Limited Partners as defined by the Limited Partner Agreement (LPA).
- Step 1 – Assess Capital Requirements: Fund managers must first determine the need for additional capital, which may arise due to new investment opportunities or ongoing fund expenses, such as management fees, legal and accounting fees, and other operational costs.
- Step 2 – Issue Capital Call Notice: Upon assessing capital requirements, fund managers issue a capital call notice, typically through email or other electronic means. This notice informs investors of the capital call amount, payment deadline, and consequences of non-compliance with payment terms.
- Step 3 – Monitor Investor Responses: Fund managers closely monitor investor responses to ensure timely capital contributions. If an investor fails to make the required payment, the management team follows up to determine the reason for the delay and may seek alternative funding sources if necessary.
- Step 4 – Limited Partners Contribute Capital: Investors, primarily Limited Partners, contribute their pro-rata share of the capital call amount by the specified payment deadline. Fund managers reconcile the received capital against bank records to confirm accurate and complete funding.