How Does Carry in a Venture Capital Fund Work?
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How Does Carry in a
How Does Carry in a Venture Capital Fund Work?
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Carry is like an incentive fee or almost like profit-sharing off of the VC's investments. So a venture capital firm, like all the top firms on Sand Hill Road or New York, or LA, Texas, they will go to limited partners who are the big kind of money people or money groups. And those can be endowments, foundations, pension funds, even individuals. And they'll raise capital from those folks and put it into a fund and so, nowadays venture capital funds have gotten huge, but it used to be, you know, a $50 million fund, $100 million fund, $200 million fund, something like that. Now it's like in the billions, oftentimes, and the venture capitalists get to collect both a management fee, usually 2 or 3%, industry standard's like 2%, but if you're super small or super famous and awesome, you might get 3%. And that is kind of the revenue stream of the fund or the fund management company, the people, the group that employs all the people that work for the fund and they take that revenue, and pay salaries, and sometimes invest in technology, and travel, and things like that, sometimes make a small profit.
And then the second component of their incentives or fees is carry and the standard carry is 20% of all profits, now again, if you're a super famous, awesome, fund that has a waiting list for tons of investors, you might charge 30%. There's also things around like, until you hit a 3x, you charge 20%, and then you charge a higher percentage after you've returned 3 times the fund's money to investors. So there's kind of performance incentives built into the carry, but for our purposes, let's just stick with the normal 20%. So over a 3, 4 year period, the fund invests all its capital, and there's some companies that don't make it and they go out of business, but there's some companies that do really, really well. And all of a sudden the value of the fund is climbing above what was invested. And so maybe you have a $100 million fund to make the math easy and all of a sudden, it's at a $200 million net asset value.
That's what the fair market value, according to the accountants and markups on other VC rounds tells you and then there's a liquidation event, a company goes public and say, out of that $200 million of value, a company goes public and creates $150 million of value that's distributed to the limited partners. Well, it was a $100 million fund and you just distributed $150 million in value. That means the fund not only paid its capital back, but has a $50 million profit today. Now there's still value left in that portfolio because this is just one company, there's many other companies in the portfolio, but you have a $50 million gain if you're the venture capital fund. And so the 20% carry that we talked about means that you get to keep as a fund group, as a management team of the fund, 20% of that $50 million, 20% of the profits.
And you'll get to keep 20% of all the remaining distributions as well into the future until the fund is closed. So this is a great, awesome moment for VCs. It means they've done their job well, it means they're finally making a good amount of money. And for the limited partners, they're excited too, because this was the fee arrangement. And now not only do we get our capital back, but we're also making a return. So remember the carry or profit sharing, incentive fee, whatever you want to call it, is a way for the venture capitalist to share in the upside of the fund. And there are funds that charge 30%, 35%, but kind of the plain vanilla, middle of the road is always 20. Now the carry is then split, in this case, on that $50 million gain, $10 million of profits is split amongst the members of the fund.
Now it's kind of like many things in life, the people who kind of are the people who raised the money, and make the best investments over time, and build their brand and maybe start the fund, they get the majority of the returns of the carry, but junior people or operating people also get to participate, usually they get a percentage of the carry, it's usually discussed as a percentage. So you might, a new partner might get 10% of the carry in the fund and if you're doing the math on that, you take the 20%, which is standard for everybody that everyone's sharing in, and 10% of that, that means you're getting 2% of all profits. That's how the math works for the individual in the fund. So if we were to go back to that $50 million gain and say an individual owns 10% of the carry in the fund, it's 20% of 50 million is a $10 million profit.
Does your VC-backed startup need help to manage your books, burn, and projections? Kruze’s clients have raised over $5.5 billion in venture funding - find out how we help companies fly through diligence and raise the next round: https://kruzeconsulting.com/startup-v...
Carry is like an incentive fee or almost like profit-sharing off of the VC's investments. So a venture capital firm, like all the top firms on Sand Hill Road or New York, or LA, Texas, they will go to limited partners who are the big kind of money people or money groups. And those can be endowments, foundations, pension funds, even individuals. And they'll raise capital from those folks and put it into a fund and so, nowadays venture capital funds have gotten huge, but it used to be, you know, a $50 million fund, $100 million fund, $200 million fund, something like that. Now it's like in the billions, oftentimes, and the venture capitalists get to collect both a management fee, usually 2 or 3%, industry standard's like 2%, but if you're super small or super famous and awesome, you might get 3%. And that is kind of the revenue stream of the fund or the fund management company, the people, the group that employs all the people that work for the fund and they take that revenue, and pay salaries, and sometimes invest in technology, and travel, and things like that, sometimes make a small profit.
And then the second component of their incentives or fees is carry and the standard carry is 20% of all profits, now again, if you're a super famous, awesome, fund that has a waiting list for tons of investors, you might charge 30%. There's also things around like, until you hit a 3x, you charge 20%, and then you charge a higher percentage after you've returned 3 times the fund's money to investors. So there's kind of performance incentives built into the carry, but for our purposes, let's just stick with the normal 20%. So over a 3, 4 year period, the fund invests all its capital, and there's some companies that don't make it and they go out of business, but there's some companies that do really, really well. And all of a sudden the value of the fund is climbing above what was invested. And so maybe you have a $100 million fund to make the math easy and all of a sudden, it's at a $200 million net asset value.
That's what the fair market value, according to the accountants and markups on other VC rounds tells you and then there's a liquidation event, a company goes public and say, out of that $200 million of value, a company goes public and creates $150 million of value that's distributed to the limited partners. Well, it was a $100 million fund and you just distributed $150 million in value. That means the fund not only paid its capital back, but has a $50 million profit today. Now there's still value left in that portfolio because this is just one company, there's many other companies in the portfolio, but you have a $50 million gain if you're the venture capital fund. And so the 20% carry that we talked about means that you get to keep as a fund group, as a management team of the fund, 20% of that $50 million, 20% of the profits.
And you'll get to keep 20% of all the remaining distributions as well into the future until the fund is closed. So this is a great, awesome moment for VCs. It means they've done their job well, it means they're finally making a good amount of money. And for the limited partners, they're excited too, because this was the fee arrangement. And now not only do we get our capital back, but we're also making a return. So remember the carry or profit sharing, incentive fee, whatever you want to call it, is a way for the venture capitalist to share in the upside of the fund. And there are funds that charge 30%, 35%, but kind of the plain vanilla, middle of the road is always 20. Now the carry is then split, in this case, on that $50 million gain, $10 million of profits is split amongst the members of the fund.
Now it's kind of like many things in life, the people who kind of are the people who raised the money, and make the best investments over time, and build their brand and maybe start the fund, they get the majority of the returns of the carry, but junior people or operating people also get to participate, usually they get a percentage of the carry, it's usually discussed as a percentage. So you might, a new partner might get 10% of the carry in the fund and if you're doing the math on that, you take the 20%, which is standard for everybody that everyone's sharing in, and 10% of that, that means you're getting 2% of all profits. That's how the math works for the individual in the fund. So if we were to go back to that $50 million gain and say an individual owns 10% of the carry in the fund, it's 20% of 50 million is a $10 million profit.
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