What is an example of a 2 and 20 rule in venture capital?

Almost all investment firms have the same charging structure. They charge 2% of the fund base a year as a fee and then take 20% as a bonus when good things happen.

A better question is what are the exceptions to 2 and 20?

Almost every VC and hedge fund charges 2 and 20.

  • 2% management fees to keep the lights on (And which is what gets the average poor-performing VCs rich-ish)
  • 20% performance fees to get investors rich if things work out (which they generally don’t)

Charging less

VCs that charge less typically do with extension funds that write growth investments into their existing portfolio.

The argument for less is that there isn’t much work to do in managing the extension investments, so why should they get the same management fees?

Charging more

Charging more happens both for tiny firms and huge firms.

Tiny firms

When small VCs start out the fund may be too small to cover the costs and the ‘value add’ things that they want to offer, and LPs agree they want as part of their investment thesis.

Small firms might charge 3 or even 3.5% management fees.

Large firms

If you are a top, top fund, you can do whatever you want because investors want in your fund. Firms like Accel and Sequoia charge more like 2.5% MF. I forget what the exact numbers are as been a while since people told me!

Things get crazy in hedge fund land.

The Medallion fund, available only to Renaissance Technology employees, has generated returns of 40% a year since 1988. That is net performance. It is after they charge 5% management fee and 44% performance fee.

Why? Because they can.

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