Compare
| Component | Role | Economics |
|---|---|---|
| Limited Partners (LPs) | Provide capital (endowments, pensions, family offices) | 90–99% of fund profits after hurdle |
| General Partners (GPs) | Manage fund, select investments | 2% management fee + 20% carry |
| Fund life | 10 years (with 2-year extensions) | First 5 years invest, last 5 harvest |
| Carry (carried interest) | GP’s profit share above hurdle rate | Typically 20% of profits above 8% hurdle |
Key point
VC returns follow a power law: a small number of investments generate the vast majority of returns. A top-tier fund might invest in 30 companies, but 1–2 home runs (10–100x returns) drive the fund’s overall performance.
Try it
Think of the most valuable tech companies today. Most were VC-backed. The early investors in those companies earned 100–1000x returns — but for every mega-winner, there were dozens of failures.
Check-in
A VC fund invests in 30 companies. 20 fail completely, 8 return 1–3x, and 2 return 50x. Is this a successful fund?
Key insight
Check-in
VC Fund A deploys $100M across 20 companies. 10 die (0x return), 8 return 1x ($80M), 1 returns 5x ($25M), 1 returns 20x ($100M). Total proceeds: $205M. Is this a successful fund?
Check your understanding
Sit with the ideas.
A $400 million VC fund charges 2% management fees and 20% carried interest above an 8% hurdle. After 10 years, the fund returns $1.2 billion to LPs. Approximately how much does the GP earn in total (fees + carry)?
Why: