A capital call is a formal request for money that investors have already committed but have not yet paid. In a venture fund, limited partners make a legally binding commitment, then the venture capital firm calls the money down over time as it invests. Refusing a mandated call can bring substantial penalties. section 9.2
When a refused call ends the financing
Ambric secured approval for a Series C round from three major investors. During the deep recession of 2008, however, the investors’ limited partners refused the contractually mandated cash call. Without that funding, Ambric shut down. The uncomfortable lesson: an approved financing is not secure until committed capital actually arrives. section 19.2
A capital call matters because it:
- Turns a fund commitment into usable investment capital as the fund makes investments. section 9.2
- Creates a funding obligation whose failure can carry substantial penalties for the investor. section 9.2
- Can determine whether a company completes a financing or shuts down when investors refuse to fund. section 19.2
