Who do we think is right?
After considering this new evidence, I’m willing to concede that VentureSouth’s view was wrong and the step-down approach is very far from universal.
The most recent plausible survey that covers these issues that I’ve found is the “Different” report – source here. Though the sample size and some of the exact management fee bases are unclear, it seems that 66% of funds have a “dramatic decline” in management fee in the middle of the fund, which seems likely to be mostly the step-down approach.
We wanted to see if that was true of funds we know too. Excluding the VentureSouth funds (more on those later), 46% of southeastern early stage funds for which we have investment documents used the definitive step-down approach; about 20% were unclear (we only had high level marketing materials, not the legal documents needed to be certain); and the rest used something else – either a flat fee or some kind of hybrid declining basis.
Based on that best data we have, I think it’s probably fair to conclude that a majority, but perhaps only a small majority, of funds use the step-down approach.
That’s pretty staggering.