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Venture Capital management fees: the evidence

Paul Clark
Paul Clark
Last updated: June 4, 2024
Venture south fallback

The evidence

Before I dived back into research, I thought the evidence would overwhelmingly support the “VentureSouth view.” My evidence included:

  • Advice from our counsel when we were forming the first VentureSouth sidecar fund in 2014 that the “step down approach” was typical.
  • Examples from nearby industries:
    • like the private equity fund industry, where the ILPA model documents (here), for example page 5 of the term sheet, definitely describe the step-down approach
    • like SBIC funds, where the SBA model agreement defines “management fee base” using the step-down approach.
  • Public guides on VC funds:
    • like at Seraf: “In most cases, this level of management fee [2% of committed capital] will be in place for a limited time period.  For example it might just apply for the first 5 years of the fund. This is the time period in which new investments are made and most of the follow-on investments occur. After the first 5 years, the 2% fee is usually based on the remaining invested capital (i.e. the amount of capital the fund has invested in active companies in the portfolio.) Over the life of this $50M fund, the fund will pay out in the neighborhood of $7.5M in management fees. That represents 15% of the fund’s original committed capital.”
    • or at Quora where the first answer is the step-down approach: “This is usually 2% of the committed investment to the fund but declines after the fund is done investing in new companies - usually year 5 or 6. Starting after the end of the "investment period" the fee will decline annually based on a negotiated formula.”
  • Occasionally perusing offering documents from funds in the Southeast, angel sidecar funds from across the US, and other precedent documents we’ve collected over time
  • And other analyses, where the assumptions seem (to me) more likely to be a step-down approach than a flat fee. For example, this post on recycling from VC godfather Brad Feld, which states a standard 15% fee load – which is surely more likely step down than a flat 1.5% for 10 years, especially given this earlier article explicitly describing the step-down approach.

But as I dug into the evidence, it seems there is actually good support for the alternative view.

  • Views of generally well-informed capital allocators (like Samir), and of VCs that are trying to make the case (that they presumably believe) that their step-down approach (like Tyler) means they are offering VC funds at a 40% lower price than “traditional fees”.
  • Academic literature:
    • Kate Litvak’s article Venture Capital Limited Partnership Agreements: Understanding Compensation Arrangements (University of Chicago Law Review, 2009), based on 68 fund agreements from 28 VCs, from over time (mean vintage 1997). These had nine different ways to calculate management fees, including the “classic flat fee”, a rising-then-falling fee based on deployed capital, the step-down approach, and variations on all three. The “most popular” of those is the classic flat fee (page 170 and see table 2), and the majority (38 of 69) were variations on that approach.
  • Other public notes:
  • Like the second answer on the Quora thread, which disagrees:  Normal fees are "2 and 20"--2% management fee, paid every year, based on your total commitment (even if they haven't deployed all your capital).
  • Or this description from Bill Clark (no relation).
  • Or anything coming out of AngelList and their Rolling Fund managers as they try to prove their default economics are standard.

So who do you think has the better evidence?