VC funds don’t have a hurdle?
Recently learnt from a friend that VC funds don’t have the typical 8% hurdle that PE / RE funds do. How have they been able to get away with this?
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Based on the most helpful WSO content, it's true that many VC funds don't have the typical 8% hurdle rate that is common in PE or RE funds. This is largely due to the nature of venture capital investing. VC funds often operate with a different risk-return profile compared to PE or RE funds. They invest in early-stage, high-growth companies where the potential for outsized returns compensates for the lack of a hurdle rate.
Additionally, the structure of VC funds is such that they rely heavily on the "home run" investments to drive returns, as many portfolio companies may fail or generate minimal returns. This high-risk, high-reward dynamic allows VC funds to justify not having a hurdle rate, as LPs are often more focused on the potential for exponential returns rather than a guaranteed minimum return.
Moreover, the competitive fundraising environment for top-tier VC firms, which are often oversubscribed, gives them the leverage to structure their funds without a hurdle rate. LPs are willing to accept this because of the potential for significant upside, especially with firms that have a strong track record of success.
Sources: Venture Capital Salary versus BB and Private Equity, https://www.wallstreetoasis.com/forum/venture-capital/vc-is-a-laughable-shitshow-change-my-mind?customgpt=1, https://www.wallstreetoasis.com/forum/private-equity/why-i-left-pe-switched-to-the-public-markets?customgpt=1, Starting a Private Equity Fund/Firm, Why I Left PE & Switched to the Public Markets
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