How venture capital funds make money: why one big win pays for all the startups that fail
Management fee and carried interest: how a venture capitalist gets paid
A venture capitalist runs other people's money for ten years. People in the business call the pay '2 and 20'. What do those two numbers pay for, and who pays them?
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1
Miva now runs a fund of $100 million for ten years. Her firm is the small company that runs the fund, and it does not work for free. Each year, it takes 2% of the fund to pay for salaries, an office and trips to meet founders: $2 million a year. This is the management fee.
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2
Over ten years, that comes to about $20 million. So of the $100 million, about $80 million is left to put into startups.
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3
Her real pay waits for the end. First, the limited partners get back every dollar they put in. If the fund brings back only $100 million, that is all of it, and Miva gets nothing more.
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4
Only what comes after that is profit, and Miva's firm keeps a fifth of it. If the fund brings back $200 million, the profit is $100 million: $20 million for Miva, $80 million more for the limited partners. That fifth is the carried interest, or carry.
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5
People call this deal "2 and 20". The 2 pays the bills. The 20 is what can make Miva rich, and only if the fund turns $100 million into much more. She will pick twenty startups to do it.
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Quick check
Fees and profit.
Show the answer
None. The limited partners first get back all they put in, and nothing is left over: no profit, so no carry.
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Go further
Two numbers you meet in almost every fund.