For our October series of posts, we have been investigating what venture capital funds actually charge in management fees. We hope you’ll learn something - as we did.
The hypothesis:
The VentureSouth view: Venture capital and similar funds that invest in early-stage companies (like the VentureSouth sidecar funds) charge an annual management fee that is calculated as follows:
2% of committed capital for the “commitment period” (the period when new investments are being made, say five years), plus
2% of (net) invested capital for the “harvesting period” (the period when old investments are being sold, say the second five years).
We’ll call this the “step-down approach” in this series.
Prompted by some recent discussions on “VC Twitter” we went back to see if the VentureSouth view was correct. We were surprised – and a little disturbed – to find out we were…possibly…wrong…
An alternative view: Venture capital funds traditionally and/or generally charge 2% of committed capital for the whole of the fund’s (typically 10 year) life.
Here are some recent examples of the alternative view:
Gyan Kapur telling us on Twitter that the traditional approach is to move down after the 10-12-year mark
Samir Kaji explaining (here and here) that 22-25% of capital goes towards management fees and expenses (so at least 2% per year for at least 10 years)
AngelList’s rolling funds have a default charge of “2% per annum over each fund's 10-year life, payable quarterly over the first four years” (so 20% “total load” with the cash going out faster). (Yikes.) They say this is modeled on traditional VC fund practice.
So which view is right? We’ll unpack the evidence and share some other thoughts about who cares about this over the next few posts. Hope you’ll join us!