Fund Economics (2/20)

To understand venture capitalists, you must understand how they make money. Standard VC funds operate on a "2 and 20" model.

Management Fees (The 2%)

Funds charge a management fee to cover salaries, office space, and operations. This is typically 2% of committed capital per year for the 10-year life of the fund.
Example: A $100M fund charges $2M/year. Over 10 years, $20M goes to fees. Only $80M is actually invested in startups.

Calculate management fees over a fund lifecycle.

Carried Interest / Carry (The 20%)

Carry is the profit share. When the fund returns capital to its Limited Partners (LPs), the GPs (the VCs) keep 20% of the profits.
Example: A $100M fund generates $300M in exits. The first $100M goes back to LPs to return the principal. Of the $200M profit, the VCs keep 20% ($40M) and the LPs get 80% ($160M).

Calculate LP and GP returns with our Carry Calculator.

The Power Law

Because most startups fail (returning 0x), a fund relies on 1 or 2 massive winners (returning 50x+) to pay back the losses, return the principal, and generate profit. This is why VCs only invest in companies that have the theoretical market size to return the entire fund.