Banking Services for Venture Capital Funds

Banking relationships form essential infrastructure for venture capital fund operations. From basic operating accounts to subscription credit facilities, the right banking setup supports efficient fund management while meeting regulatory and LP requirements. The banking landscape for VC funds has evolved considerably, particularly following events that highlighted concentration risk in the startup banking ecosystem.

Account Structure

Venture capital operations typically require multiple accounts across different entities and purposes. A standard structure might include:

• Fund Operating Account: The primary account for fund-level cash management, receiving capital contributions and disbursing for investments and expenses. Most funds maintain this at a major bank with established fund services capabilities.
• Management Company Account: Separate from fund accounts, this handles management fee receipts and operating expenses for the GP entity. Maintaining clear separation between fund and management company finances is essential for proper accounting and regulatory compliance.
• Distribution Account: Some funds maintain dedicated accounts for processing distributions to LPs, which can simplify reconciliation and audit trail documentation.
• Escrow Accounts: May be needed for specific transactions, holdbacks, or other situations requiring segregated funds with third-party controls.

Bank Selection Criteria

Choosing banking partners involves balancing several considerations. Fund services experience matters—banks familiar with private fund structures understand the unique requirements around capital calls, investor communications, and reporting. Some banks offer integrated fund administration and banking services that may provide operational efficiencies.

Concentration risk deserves attention following high-profile bank failures. Maintaining relationships with multiple banking institutions, using sweep arrangements to spread deposits, and monitoring deposit insurance coverage help manage this risk. Many institutional LPs now inquire about fund banking arrangements as part of operational due diligence.

Technology and integration capabilities increasingly differentiate banks. API access for cash management systems, quality of online banking platforms, and integration with fund administration software affect operational efficiency. Evaluate these capabilities alongside traditional banking considerations.

Subscription Credit Facilities

Subscription lines of credit, secured by LP capital commitments, have become common in venture capital. These facilities allow funds to make investments quickly without waiting for capital call proceeds, smooth cash flow timing, and potentially enhance IRR through delayed capital calls.

Key terms in subscription facilities include:

• Borrowing Base: The formula determining available credit based on uncalled commitments from eligible LPs. Banks apply different inclusion criteria and advance rates, affecting facility size.
• Interest Rate: Typically tied to SOFR or another reference rate plus a spread. Competitive terms depend on LP quality and fund size.
• Covenants: Requirements around borrowing base maintenance, reporting, and fund operations that must be monitored for compliance.
• Term and Clean-Down: Many facilities require periodic paydown or have limited terms, affecting how they can be used operationally.

LPA provisions governing subscription facility use vary. Some agreements limit facility size, duration of borrowing, or require specific disclosures to LPs. Review governing documents carefully before establishing facilities.

Cash Management

Effective cash management balances liquidity needs against yield on uninvested cash. VC funds typically maintain significant cash balances at various points—after capital calls but before deployment, while holding reserves for follow-ons, and in preparation for distributions.

Conservative investment policies typically govern fund cash. Money market funds, Treasury securities, and high-quality short-term instruments are common choices. The LPA may specify permitted investments, and fiduciary duty considerations weigh against reaching for yield with fund capital.

Reserve management requires particular attention in VC contexts. Most funds maintain substantial reserves for follow-on investments in successful portfolio companies. Cash forecasting that accounts for anticipated follow-ons, management fees, and expenses helps ensure liquidity while maximizing deployment efficiency.

Payment Processing

Capital calls and distributions involve significant payment volumes that benefit from systematic processes. Wire transfers remain the standard for larger fund transactions, though ACH may be used for smaller amounts or when timing permits. Establishing standing instructions with LP banks can reduce friction in capital activity.

International payments introduce additional complexity. Cross-border wires, currency conversion, and correspondent bank relationships affect timing and costs. For funds with non-U.S. LPs, understanding these mechanics helps set appropriate expectations around capital activity timing.

Bank Reporting and Integration

Quality banking relationships provide robust reporting that integrates with fund operations. Daily balance reports, transaction detail, and historical data support reconciliation and management oversight. Automated feeds to accounting systems reduce manual data entry and associated errors.

Questions to Ask Potential Banking Partners

• What experience does the bank have specifically with venture capital fund structures?
• What subscription credit facility terms are available, and what LP inclusion criteria apply?
• How does the bank's technology integrate with common fund administration platforms?
• What deposit insurance coverage and sweep arrangements are available for managing concentration risk?
• What are typical timelines for account opening and facility documentation?
• How are international wire transfers handled, and what are typical processing times and fees?

Banking infrastructure, while sometimes overlooked in fund formation, affects operational efficiency throughout the fund's life. Establishing appropriate relationships and systems from inception supports smooth operations and positions the fund to respond quickly to investment opportunities.