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We spend a lot of time talking about new funds, and new startup venture raises, but we spend little time talking about the cash flow challenges of running a venture fund. Let’s change that today.
Starting a new venture fund is extremely challenging. In addition to just the monstrous task of fundraising — which can take as long as two years in some cases to lock down all the limited partners (LPs) on the same terms — the economics for a debut fund are often just terrible.
Sort - Seed - Fund - Partners - Industry
Take a sort of starter $20 million seed fund with two general partners using the industry’s oft-quoted (but not really all that common) “2 & 20” compensation model. This hypothetical fund rakes in $400,000 a year in management fees (2% of $20 million) to cover all costs of the fund: office rent, staff costs, legal fees, tax preparation, and accounting services in addition to the travel and entertainment costs of trying to woo founders. Whatever remains is split between those two GPs as their salaries. It’s not uncommon for new partners to make $50k — or even nothing — in the early years of a new firm, which is one reason the industry is stacked with ultra-wealthy individuals.
For young financiers looking to break into the industry, the situation is bleak, which is one reason why fund managers have gotten very creative around how to structure their management fees in order to bootstrap a venture firm in its early years.
Sorts - Fund - Details - Thanks - Mike
These sorts of fund details are often kept tight-lipped, but thanks to the Mike Rothenberg case, we now actually have real data from a new firm and how it structured its fees for asset growth. From discussions with others in the industry, the models that Rothenberg Ventures used are reasonably available for investment managers looking to build...
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