A capital call or draw down is a legal right which allows venture funds to demand a transfer of promised funds from investors. The term “capital call” is used both to refer to this legal right, and to the practice of actively exercising it. Capital calls are used to ensure that a venture fund has the capital that it needs when it requires it, and to confirm that investors are committed to a project.

An investor commits to a fund in a contract which includes a clause explaining the capital call. The investor may not transfer the funds immediately, instead waiting until the fund has received commitments from other investors, and selected a project to invest in. Once the venture fund is ready to embark on a project, it will issue a capital call, at which time the investors will need to transfer their promised funds to the company. The existence of the capital call agreement will attract other investors, showing them that the fund is serious and capable of drawing upon a large pool of investment capital.

Venture firms count on accessibility to promised funds when they negotiate potential investments and projects. If investors back out of their commitment, it can represent a serious problem for the firm, as it may have made plans for those funds. Capital calls protect venture groups from unexpected shortages in capital, and ensure that a flow of funds will be available when it will be required.

Investors are also protected to some extent by a capital call. When an investor commits to get involved in a venture fund, he or she is assured that other investors will be required to inject capital when a draw down occurs. This means that the venture fund is more likely to succeed and generate a return on the investment. Since investors may rely on the coordinated funds of the whole to generate a good return, the capital call is critical to their security.

When people commit to making an investment in a fund, they will usually be given information about capital calls and how they work. In some regions, venture funds are required by law to spell out certain legal aspects of the investment contract, including the capital call. Investors would also be well advised to consult with people who have experience in the investment industry to make sure that they know what they are getting into.