capital commitment – n: a contractual agreement between
an investor and a company or venture capital firm wherein the investor commits
to provide up to a specified amount of capital (money), or any portion thereof,
over an agreed-upon period of time.
Example: If
an institutional investor (“limited partner”) agrees to invest $10 million in a
venture capital
fund, that investor does not simply send the VC a check for $10 million.
Rather, the limited
partner makes a capital commitment to the VC for the life of the fund (or the
defined investment
period of the fund). When the VC wants to make an investment in a portfolio company, it
makes a capital call to the limited partner for some portion of the investor’s
total capital
commitment – typically its pro rata share of the investment. When a capital
call occurs, the
investor is contractually obligated to provide the funds requested.
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Adapted from "The CompanyCrafters Entrepreneur's Dictionary"
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