Understanding Venture Capital Fund Structure
Venture capital fund structure determines how VC firms raise, invest, and return capital. Understanding fund structures helps entrepreneurs navigate investor relationships and helps potential LPs evaluate fund investments. This guide explains the key elements of VC fund organization, fee structures, and fund economics.
Whether you’re an entrepreneur raising capital, an aspiring VC, or someone considering investing in venture funds, understanding fund structure is essential for making informed decisions.
The Limited Partnership Structure
Most venture capital funds are organized as limited partnerships (LPs), consisting of:
General Partners (GPs)
The VC firm’s managing partners who make investment decisions, manage portfolio companies, and operate the fund. GPs have unlimited liability and receive management fees plus carried interest.
Limited Partners (LPs)
Investors who provide capital but have limited involvement in fund operations. LPs have liability limited to their committed capital. Typical LPs include:
- Pension funds
- University endowments
- Family offices
- Fund of funds
- Insurance companies
- High-net-worth individuals
VC Fund Economics
Management Fee
GPs charge an annual management fee, typically 2% of committed capital during the investment period and 2% of invested capital thereafter. This fee covers fund operations, salaries, and overhead.
Carried Interest
GPs receive carried interest (carry), typically 20% of fund profits above the hurdle rate. This aligns GP incentives with LP returns. Carry is the primary way VCs earn significant returns.
Hurdle Rate
Many funds specify a hurdle rate (typically 8%) that must be achieved before GPs earn carry. This ensures LPs receive a minimum return before profit sharing begins.
GP Commitment
GPs typically commit 1-5% of fund capital alongside LPs, demonstrating alignment of interests. This personal investment shows GPs have “skin in the game.”
Fund Lifecycle
Understanding the VC fund lifecycle helps entrepreneurs time their fundraising:
Fundraising Period (6-18 months)
GPs raise capital commitments from LPs. Capital is committed but not yet called.
Investment Period (3-5 years)
GPs identify and invest in portfolio companies. Most initial investments occur during this period.
Follow-on Period (Years 4-7)
Fund may make follow-on investments in existing portfolio companies but rarely new investments.
Harvest Period (Years 7-10+)
Focus shifts to achieving exits and returning capital to LPs. Fund begins winding down.
Fund Size Considerations
Fund size significantly impacts investment strategy:
Small Funds ($50-150M)
- Focus on seed and early-stage investments
- Smaller check sizes ($500K-$3M initial)
- Can achieve meaningful returns with smaller exits
- More personal GP involvement
Mid-Size Funds ($150-500M)
- Series A and B focus
- Check sizes of $5-20M
- Need larger exits to move the needle
- Balanced portfolio construction
Large Funds ($500M+)
- Later-stage and growth investments
- Check sizes of $20M+
- Require very large exits ($1B+)
- Often multi-stage strategies
Alternative Fund Structures
Evergreen Funds
Unlike traditional closed-end funds, evergreen funds have indefinite life and reinvest returns rather than distributing to LPs. This structure allows longer holding periods and eliminates pressure to exit.
Angel Investment Funds
Angel funds pool capital from multiple angels to invest together, providing diversification and shared due diligence. These funds are typically smaller and invest earlier than traditional VCs.
Corporate Venture Capital
CVCs are funded by corporations seeking strategic investments. They may have different return requirements and longer time horizons than traditional VC funds.
Frequently Asked Questions
What is venture capital fund structure?
Venture capital fund structure refers to the legal and economic organization of a VC fund. Most funds are limited partnerships with General Partners (fund managers) and Limited Partners (investors). The structure defines fee arrangements, profit sharing, investment periods, and governance.
How does VC fund structure affect entrepreneurs?
Fund structure impacts VC behavior. Fund size determines check sizes and return requirements. Fund age affects investment pace. Fee structures create incentives for fund deployment. Understanding your investor’s fund structure helps you predict their behavior and timeline.
What is the typical VC fee structure?
The standard VC fee structure is “2 and 20” – 2% annual management fee on committed capital plus 20% carried interest on profits above the hurdle rate. Some funds have variations including lower fees for larger commitments or tiered carry structures.
What are venture capital fund returns?
Venture capital fund returns vary widely. Top-quartile funds may return 3x+ invested capital, while median funds often return 1-2x. Returns are measured by Multiple on Invested Capital (MOIC) and Internal Rate of Return (IRR). Returns have historically been driven by a small number of “home run” investments.
What is an evergreen fund structure?
An evergreen fund has no fixed end date and reinvests returns rather than distributing to LPs. This structure allows patient capital, longer holding periods, and eliminates forced exits. Evergreen structures are becoming more popular for both VC and angel funds.
How long is a typical VC fund lifecycle?
Traditional VC funds have 10-year terms with possible extensions. The investment period is typically 3-5 years, followed by harvest and wind-down. Most funds are structured to return all capital within 10-12 years, though extensions are common.
What is GP commitment in venture capital?
GP commitment is the capital that fund managers (General Partners) invest alongside their LPs. Typically 1-5% of fund size, GP commitment demonstrates alignment of interests – GPs have their personal capital at risk alongside LP capital.
What’s the difference between VC funds and angel funds?
VC funds are professionally managed pools of institutional capital, typically $50M+, investing in Series A and beyond. Angel funds are smaller pools of individual investor capital, typically under $20M, investing at seed stage. Angel funds have simpler structures and lower minimums.
How do fund of funds work in venture capital?
Fund of funds (FoF) invest in multiple VC funds rather than directly in companies. FoFs provide diversification across managers, vintages, and strategies. They charge additional fees (typically 1% management + 5-10% carry) on top of underlying fund fees.
What is a hurdle rate in VC fund structure?
A hurdle rate is the minimum return LPs must receive before GPs earn carried interest. Typically 8%, the hurdle ensures LPs receive a baseline return before profit sharing. Some funds have no hurdle, meaning GPs earn carry from the first dollar of profit.
How do capital calls work in VC funds?
LPs commit capital but don’t pay upfront. GPs issue capital calls when they need funds for investments or fees. LPs have a short period (typically 10-30 days) to fund capital calls. This structure allows LPs to earn returns on uncommitted capital.
What is carried interest?
Carried interest (carry) is the GP’s share of fund profits, typically 20%. Carry is performance compensation that aligns GP incentives with LP returns. Carry is only earned after returning LP capital and achieving any hurdle rate. It’s taxed as capital gains rather than ordinary income.