Question Regarding VC Fund Structure
I am trying to back into / estimate the equity check of a later stage vc fund. Lets assume a 500M fund. I had some questions to see if this would even be possible:
I know that the standard is a 2% management fee annually over fund life that decreases as the fund stops doing deals and starts to harvest. Is this fee deducted from the fund (I.e. 50M over course of 5 yr life) is not investable or is this paid to the vc firm separately? I know that the fee is usually for overhead like salaries, keeping the lights on etc but does it also include diligence and other dead deal costs? If not, what % of the fund would go to this?
Is there an average number of investments that a later stage fund would do? I get that there is a balance between diversification and making concentrated bets but given these companies would be much more later stage, is it possible to do just 7-10 investments? Ive heard a rule of thumb for early stage vcs (seed through B) is 15-20 and shoot for at the very least 1/3 homeruns that each return 10x the entire fund, 1/3 solid hitters that return 2-3x, and 1/3 duds. Is this still the case for the later stage guys or are they more targeted to just trying to get the solid 2-3x returns?
Any other factors im not considering here?
Thanks in advance!
On 1, the fees are deducted from the amount raised is about 15-20% (for VC, there often isn't a step down in fees post investment period). However, recycling of management fees combined with some exits usually allows the headline amount raised to be invested.
Diligence and other deal costs, which are quite low in VC (vs buyout) are usually considered partnership expenses and are incremental to the management fees
This is really helpful- had two clarifying questions here:
The LPA specifies if recycling of management fees can occur and what these recycled fees can be used for. So LPs know this before committing to the fund.
The recycling can only occur from actual distributions. In buyout funds this is a lot more common but in venture the distributions are likely to come from average companies since VCs tend to ride their winners as long as they can.
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