Two and Twenty: What’s ‘Market’ for Venture Funds These Days?

This post is by Michael Gorman from Top Tier Capital Partners Blog

Two and Twenty: What’s Market for Venture Funds These Days?
One of the most frequently asked questions from our venture managers is “What is market?” Whether market refers to terms like management fees and carry, compensation for employees, number of companies per fund, or the size of LPs, the term that is hardest to find data on is economics. The old adage of “two and twenty,” referring to 2% management fees per year and 20% carry, is now more like “two and twenty-five,”  but even that has a number of clarifying footnotes. We set out to try to answer this question, including breaking down the group by size of fund. What we can report right now, is that there is absolutely no correlation between economics and returns in our grouping of managers. 

As a fund of funds focused exclusively on venture, we meet with hundreds of managers per year and hear all of the rationales for higher fees: everything from recruiting and retaining talent, to lack of funds under management. In the end, management fees do not return a multiple of capital, but only add to the hole a fund must dig out of, requiring larger outcomes from investments. The bigger the hole, the slower, and less likely a fund will get in the coveted carry and returning multiples of capital to investors.

We looked at Top Tier’s commitments to venture funds from 2011 vintages through current day, for fund sizes $600 million and below. The funds are primarily in the U.S., but are a mix across stages and sectors. (Read more…)