VCs often use the shorthand phrase “two and twenty” to refer to the 2% of annual management fees a venture fund might take and the 20% carried interest (or “performance fee”) it would charge. In a nutshell: If a venture fund turns a $100 million profit from its investments, the fund gets to keep $20 million of that, and the remaining $80 million is paid out to the limited partners.
The “2 and 20” fee structure was originally associated with hedge funds, but VC firms and other investment funds use it as well. The structure breaks down into two types of fees: a management fee and a performance fee.
The management fee is a yearly charge calculated based on the total assets under management (AUM). Typically, the management fee is 2% of AUM, but new data from Carta shows that the 2% figure isn’t as universal as you might have been led to believe.
First, it’s useful to understand what the management fee is for. Basically, it compensates the fund managers, regardless of the fund’s performance. So a VC firm that charges a 2% fee for managing a $100 million fund will receive $2 million per year to cover rent, staff costs, marketing, travel and, well, everything else.
The other part of the compensation is the carried interest — the portion of the profits that the VC firm takes once investments start paying off. Most commonly, this is set at 20% of the fund’s profits, with the idea being it works as an incentive to encourage the VC firm to maximize returns. Yes, just getting paid the management fee can be lucrative, but the get-rich-slow scheme for venture capitalists is the carry, as their compensation increases when the fund performs better. There are also variations to these fee structures — for instance, performance fees might only apply once a certain hurdle rate or minimum return is achieved.
So while 2 and 20 is a pretty common shorthand, I was intrigued to learn from Carta’s head of insights, Peter Walker, that the numbers are actually not as set-in-steel as we think.
Two percent appears to be the most common fee rate, especially for funds with less than $100 million in AUM. Above that, though, the rate climbs to a median of around 2.5%. More than 50% of small funds that manage $10 million or less enjoy a 2% management fee, but nearly three-fourths of the funds that manage $500 million or more are able to claim 2.5% management fees, per Carta data.
Fund management fees. Image Credits: Carta
Obviously, larger funds also have more administration to do, but given that they start from a higher base to begin with, it means they collect at least $12 million per year.
It’s worth noting that the data is for the initial period of each fund, which is usually the first two years of a fund’s investment period. Some funds are structured so that the management fees drop gradually after the initial investment period.
FAQs
VCs often use the shorthand phrase “two and twenty” to refer to the 2% of annual management fees a venture fund might take and the 20% carried interest (or “performance fee”) it would charge.
What is the 2 and 20 fee structure? ›
The 2 and 20 is a hedge fund compensation structure consisting of a management fee and a performance fee. 2% represents a management fee which is applied to the total assets under management. A 20% performance fee is charged on the profits that the hedge fund generates, beyond a specified minimum threshold.
What is the average ROI for venture capital? ›
They expect a return of between 25% and 35% per year over the lifetime of the investment. Because these investments represent such a tiny part of the institutional investors' portfolios, venture capitalists have a lot of latitude.
What is the average fee structure for a VC fund? ›
The typical range for management fees is 1.5% to 2.5% per year, depending on the size, stage, and strategy of your fund. Some funds may also adjust their management fees over time, such as reducing them after the investment period or linking them to performance.
How does 2 and 20 work in VC? ›
Two refers to the standard management fee of 2% of assets annually, while 20 means the incentive fee of 20% of profits above a certain threshold known as the hurdle rate.
What discount rate do VCs use? ›
Purpose – Venture capitalists typically use discount rates in the range of 30-70 percent. During the startup stage of venture-capital financing, discount rates between 50 and 70 percent are common. The discount rate decreases from the first through fourth stage: from 60 to 30 percent.
What is the 2 and 20 VC model? ›
The 2 and 20 fee structure is a compensation model commonly used by venture capitalists. It involves a fixed management fee (typically 2% of the total asset value) and a performance fee (usually 20% of the fund's profits) that the VC manager receives.
What is the VC 2 20 rule? ›
At its most basic, the two and twenty is basically the standard fee structure for venture capital firms to charge their investors. The 2% is the annual fee that the fund charges investors to manage the fund. And the 20% is the percentage of the upside that the fund managers take.
What is an example of 2 and 20? ›
Consider the example above. With a fund charging two and twenty, a 20% return on an investment of $2 million became a 14% return after fees. An investor who could find a cheaper investment charging less than 1% would earn more if that investment returned just 15%, three-quarters of the return the fund manager earned.
What is the 100 10 1 rule for venture capital? ›
100/10/1 Rule - Investor screens 100 projects, finance 10 of them, and be lucky & able to enough to find the 1 successful one. Sudden Death Risk - Where the founder stops/loses capability to work on the idea. Investors usually choose the incubator strategy to avoid this risk.
The recency of funding - Generally speaking, venture debt providers who come in immediately following an equity raise will loan up to 40% of a funding round. So, if XYZ startup raised $20M, they would be eligible for up to an additional $10M venture debt facility.
Is venture capital high paying? ›
Venture Capital Salary. $71,500 is the 25th percentile. Salaries below this are outliers. $119,500 is the 75th percentile.
What is a good return for a VC fund? ›
Top VCs are typically looking to return 3-5X+ on their entire fund to their LP investors over ~10 years. For this, they need multiple 'fund mover' outcomes in each fund, since many early-stage investments will eventually fail or return only a small % of the fund.
Where do VC funds get their money? ›
VC firms typically control a pool of funds collected from wealthy individuals, insurance companies, pension funds, and other institutional investors. Although all of the partners have partial ownership of the fund, the VC firm decides how the monies will be invested.
How big should a VC fund be? ›
The topline: The optimal venture fund size is $200 million to $350 million, according to Santé's new analysis. These funds are able to generate higher returns via typical exits.
What are the fees for investment management? ›
The management fee varies but usually ranges anywhere from 0.20% to 2.00%, depending on factors such as management style and size of the investment. Investment firms that are more passive with their investments generally charge a lower fee relative to those that manage their investments more actively.
How much do hedge funds charge their clients? ›
The fee is typically 2% of a fund's net asset value (NAV) over a 12-month period. A performance fee: also known as an incentive fee, this second fee is viewed as a reward for positive returns. Performance fees are typically set at 20% of the fund's profits.
What is the management fee for Angellist? ›
The standard management fee is 2%. In addition to management fees, VC funds usually keep 20% of the profits for their own investors, known as carry (carried interest). Note that some leads will re-invest their management fees into the fund – this is known as recycling management fees.
What are intercompany management fees? ›
Costs incurred by one related entity, some or all of which is for the benefit of another group entity.
