How Would a Person Start a Venture Capital Fund? | SaaStr (2024)

Having recently raised one, I’ve learned a lot: Jason Lemkin just raised a $70 million fund; here’s how he did it

In order to start a VC Firm you need a track record. If you haven’t already made some good investments — it’s going to be tough to start your own fund. Go work at a fund first and make some good investments there.

Assuming you have at least a partial track record, then, there are two-and-a-half basic paths on how to start a venture capital firm.

1. Start Small before your start a Venture Capital Firm

Start as an angel investor, make some good investments, and then, after proving yourself as an angel, raise a small fund. Perhaps $5m, $10m, $20m to start — mainly from Very Rich Individuals. This used to be very hard, but now it’s merely hard. Angelist’s Rolling Funds in particular now enable folks with strong followings in tech to now raising “rolling funds” with Angelist doing the vast majority of the administrative work.

2. Grow within a Venture Capital Firm

Go join an established fund, and build a track record. At least a partial one. At least invest in 2+ companies that can be Unicorns. You won’t have truly proven yourself. But it may be enough to raise a small fund.

3. Partner with someone starting a Venture Capital Firm

Often, a “financial” VC will seek out an operational partner. Or a successful, but perhaps less “branded” VC, will seek out someone with a brand, but perhaps a less established, or less traditional, track record as complementary.

What doesn’t work that well is to go straight from Successful Founder to First Time VC with a Relatively Big Fund. At least not for most LPs.

Most LPs are looking to see that you’ve put institutional capital to work — not just founded an amazing company.

Related: The 4 Questions Every Founder Should Ask Every VC. That Almost No One Asks

How Does a Venture Capital Firm Work?

The 2 and 20 Venture Capital Model

The basic model in venture capital is “2-and-20”, or 2% in committed capital paid in fees annually, and 20% of the profits going to the partners.

So take Storm V, a $180m fund.

The LPs (the Limited Partners, the folks that give VCs the money to invest) pay 2% of the committed capital each year for “fees”.

So in a $180m fund, the LPs “pay” the firm $3.6m a year to run it.

That’s not chump change, but it’s not as much as you think including rent, travel, expenses. It’s not all salaries.

And the partners also have to invest a roughly similar amount back into the firm as LPs themselves — several percent of the “committed capital.”

Then, the General Partners keep 20% of the profits — after repaying all the money invested, plus all these expenses.

Then, once the firm has returned $180,000,000 in cash back from its investments — the size of the fund — if the firm returns more than $180m, then and only then the partners get to keep 20% of whatever the profits are beyond that.

That’s returns from IPOs and acquisitions. So this can take 10-12+ years … if you even get past 1x, the so-called “hurdle” before any profits.

So if you do amazing investments it can be pretty lucrative.

If you do mediocre investments it isn’t.

If you do poor investments, in 5-10 years, you’re out of a job.

I’m making a lot of simplifications here, but it explains roughly how it all works.

Starting a Venture Capital Firm Budget and Fees

The fees in starting a venture capital firm varies a lot, but in general, you can assume about 2% of each fund goes to “management fees”, for its operational budget.

Usually, the partners will pay themselves salaries very roughly equal to about 2-3% of the size of the fund.

The rest will go to office, admin, travel and associates and non-partners.

And whatever’s left? The partners that own the management company keeps the surplus.

So let’s take a hypothetical:

  • $200m fund
  • 2.5% management fee, or $5m a year paid by LPs (the investors in the fund) for operational expenses.
  • 3 general partners, take $1.5m in salary collectively.
  • Fancy South Park office is $50k a month, or $600k a year
  • 3 EAs at $200k a year, burdened
  • 2 associates at $400k a year, burdened
  • $500k a year in travel and expenses, marketing (if any), “IT”, etc.
  • $500k in CFO and audit fees, accounting, legal, admin.

What’s left? $1.3m. The partners that own the management company split this and dividend it out to themselves.

The bigger the fund, the more of the “excess” they can keep, especially if they are partners in multiple, overlapping, active funds.

As you can see, in starting a VC, there’s a pretty large “fee drag.”

I.e., you have to actually earn a lot more on investments than you might think, because you don’t earn “carry”, or profits, until the investors reach 1x which, generally, but not always, includes repayment of fees.

Related: Small Checks From Large Venture Funds: Maybe One is Enough

The Two Skills You Need to be a good Venture Capitalist

One, being picked by at least some of the best founders.

The best founders always have options.

It’s not just about “winning” the deal.

It’s about being picked by the great ones.

At least, enough of them per year to hit your investing quota.

There are many reasons to be picked.

Track record, celebrity, value-add, reputation, brand, platform and more.

But if you aren’t picked, you have to invest in spaces, geographies, and niches where truly the very, very best founders have far fewer options.

Otherwise, even achieving 1x is difficult.

Look at the disruption of Y Combinator and Andreesen … they did what it took to be picked by many of the best.

Two, pick well from who picks you.

Now being a good “investor” comes into play.

Because the difference between a Very Good and a Great founder and start-up is subtle in the early days … but huge as time goes by.

Venture Capital Compensation

Venture capital compensation is so all over the place.

Most importantly — you have to think about earnings on a net basis.

Let’s take a $150m fund, with 3 partners … with a 2% fee structure … and 3% of the fund contributed by the partners themselves — the “capital commit” (some amount is required by LPs, the funds that invest in the VC funds).

OK, so 2% of $150m is $3m in fees per year.

That sounds like a lot, and it is. But let’s assume there’s rent, 3 associates, 2 analysts, an admin or two, and a lot of Travel & Entertainment (say, $100k per partner per year in expenses here and $25k per other professional in expenses).

Rent, non-partners, expenses, and T&E then will likely consume say $1.5m-$2m of that $3m.

That might leave $500k-$1m left for the 3 partners to split as annual salary.

Let’s call it $300k each in salary.

In this example, the partners are putting in 3% of the $150m themselves, or $4.5m over the life of the fund.

Let’s simplify and call that $450k per year (that’s too oversimplified, but makes math simple). In California, that’s probably equivalent to $700k or more in pre-tax dollars.

So the 3 partners here are “investing” $700k a year in pre-tax equivalent dollars out of their own pockets, and taking $750k out in taxable income collectively in salary.

In this case, the partners aren’t making anything net.

The earnings are only in the future profits, the carry.

Now, this is a particular example. In more established funds, the % contributed by partners is not only lower … but often the retired partners make up most of it (many times, as part of getting an ongoing % of the carry / investment profits).

In that case, especially as the fund sizes get large, the salaries can be quite large and the capital contributions quite low for the newer GPs.

At older, established, large funds, the GPs can make $1m-$1.5m and not put all that much of their own cash into the funds.

And if you can raise multiple funds quickly, you can “stack” fees on top of each other. This can create a lot of cash flow in some scenarios.

But most smaller and newer funds on a net basis don’t pay much at all if anything net of partner capital contributions. Here, you’re betting on the investments to make you money 8, 10, 12 years down the road.

And if you do that right, it is a good deal. Because you get substantial leverage on your capital commitment.

If you think of it that way, it makes a ton of sense. If you think of it in short-term economic terms, net of capital commitments … it may depress you.

Reasons you should not start a venture capital firm or join one:

  • There are very, very few partnership slots.
  • Venture capital is a tiny industry.
  • There is no point in adding a partner that isn’t accretive. So the odds of you making partner are very low. Possibly zero.
  • It is brutally competitive to get into hot deals.
  • At most firms, there is no clear promotion path and a non-GP slot usually lasts 2 years or so.
  • Firms are super-hierarchical, and patronizing. She or he with the hot hands rules it all.
  • Often, the partners can’t stand each other.
  • The skills you learn aren’t very portable to other jobs.
  • Yes, you do have to risk your own money, as a general partner at least. It varies, but often 2% of the fund comes from partners. That can be a lot.
  • In a big firm, often one person makes all the decisions. Forever.
  • You are just a number.
  • You will likely do nothing enduring, nor will you change the world in any way.
  • If you like to work on a team, it’s not a team sport.
  • Many non-GPs are pretty jaded.
  • At seed and very small firms, the salaries actually can be pretty terrible. A $20m fund might have $400,000 in fees per year to pay everyone — all the staff, rent, salaries, expenses, travel, etc.
  • Even if you do happen to be any good at it — and you probably won’t be — your boss most likely will take credit for whatever great deals you do source.
  • The world does not need another venture capitalist.

So do it if you have a true passion for it, and are willing to break through the odds — and can truly, somehow, hustle into the very best deals.

Related: The Top 10 Pieces of Advice I’d Give to My Younger CEO Self

(note: an updated SaaStr Classic post)

Related Posts

  • Is a start-up employee allowed to start a venture capital firm while employed?

  • What happens when a venture capital fund invests in a startup?

How Would a Person Start a Venture Capital Fund? | SaaStr (2024)


How Would a Person Start a Venture Capital Fund? | SaaStr? ›

Start Small before your start a Venture Capital Firm

How to start a venture capital fund? ›

How to start a venture capital firm
  1. Step one: Know your track record. ...
  2. Step two: Partner up. ...
  3. Step three: Determine your VC firm's structure. ...
  4. Step four: Fundraise and form your fund. ...
  5. Step five: Bring the resources back in. ...
  6. Step six: Operationalize your fund.
Oct 25, 2023

How to start a micro VC fund? ›

There are a few things you need to do if you want to start a micro VC firm:
  1. Raise money from limited partners.
  2. Find and vet deals.
  3. Build a strong portfolio.
  4. Create value for your portfolio companies.
  5. Exit your investments.
Mar 7, 2024

How much capital do you need to start a VC firm? ›

Setting up a fund may vary depending on the stage the fund wants to invest in, the sector or industry, and the performance objectives for its portfolio companies. Full-time GPs typically require between $20 MM and $40 MM per head in fund size to cover salaries and expenses, assuming a 2% management fee.

How to start a capital investment company? ›

  1. Choose the Name for Your Investment Company. ...
  2. Develop Your Investment Company Business Plan. ...
  3. Choose the Legal Structure for Your Investment Company. ...
  4. Secure Startup Funding for Your Investment Company (If Needed) ...
  5. Secure a Location for Your Business. ...
  6. Register Your Investment Company with the IRS. ...
  7. Open a Business Bank Account.

How do I start my own venture? ›

How to Start a Business From Scratch
  1. Start with a Good Business Idea. If you're wondering how to start a business, it may be easier than you think. ...
  2. Conduct Research About Your Business Idea. ...
  3. Write a Business Plan. ...
  4. Make Your New Business Official. ...
  5. Know Your Finances. ...
  6. Protect Your Business. ...
  7. Build Your Business.

How do I start a business venture? ›

10 Steps to Starting a Business
  1. Choose your business idea. ...
  2. Conduct market research. ...
  3. Write a business plan. ...
  4. Secure funding for your business. ...
  5. Choose your business structure. ...
  6. Register your business. ...
  7. Apply for licenses and permits. ...
  8. Open a bank account.
Jun 15, 2023

Can anyone start a VC? ›

Those who are individually wealthy can start their own funds. Young venture firms must usually prove themselves before third-party funds begin to make up a significant percentage of total capital invested.

Do VC funds make money? ›

There are 3 main ways a VC makes money. 1st revenue stream: management fees. Each fund is usually structured to be close-ended (no more money in once there is a final closing; there are variations possible with SPVS and opportunity funds…), and has a duration of 10 years (I've seen from 6 to 15 years).

What is the minimum amount for a VC fund? ›

Venture capital funds usually require a minimum investment of $250,000 to $500,000 and sometimes higher.

Where do venture capitalists get their money? ›

Venture capitalists make money in two ways. The first is a management fee for managing the firm's capital. The second is carried interest on the fund's return on investment, generally referred to as the “carry.” Management fees.

How long does it take to raise venture capital? ›

Getting a yes can easily take six months; a no can take up to a year. All the while, the emotional and physical drain leaves little energy for running the business, and cash is flowing out rather than in. Young companies can go broke while the founders are trying to get capital to fund the next growth spurt.

Can you make a lot of money in VC? ›

Salary + Bonus and Carry: Total compensation is likely in the $500K to $2 million range, depending on firm size, performance, and other factors. Carry could potentially multiply that compensation, or it could result in a total of $0 depending on the year and the firm's performance.

Can anyone create a private equity fund? ›

In the U.S. and Europe, most private equity funds are established as Limited Partnerships or Limited Liability Firms, and you'll need competent attorneys to complete all the necessary paperwork and registration documents.

Can I start an investment company for myself? ›

Depending on your jurisdiction, you might need to register with several government agencies. You should work with a lawyer to identify all requirements. Starting an investment company is a lot of work but is definitely doable.

How much money do you need to invest in a VC fund? ›

Minimum investment amounts in VC funds vary widely, depending on the fund's size, strategy, and target investor base. They typically range from a few hundred thousand to several million dollars.

Can you make money in venture capital? ›

The real upside lies in the appreciation of the portfolio. The investors get 70% to 80% of the gains; the venture capitalists get the remaining 20% to 30%. The amount of money any partner receives beyond salary is a function of the total growth of the portfolio's value and the amount of money managed per partner.

What is the 2 20 model VC? ›

VCs often use the shorthand phrase “two and twenty” to refer to the 2% of annual management fees a venture fund might take and the 20% carried interest (or “performance fee”) it would charge.

How much money do you need to be an angel investor? ›

Angel investors can be accredited investors with net worth of at least $1 million or at least $200K in annual income.


Top Articles
Latest Posts
Article information

Author: Chrissy Homenick

Last Updated:

Views: 5333

Rating: 4.3 / 5 (54 voted)

Reviews: 85% of readers found this page helpful

Author information

Name: Chrissy Homenick

Birthday: 2001-10-22

Address: 611 Kuhn Oval, Feltonbury, NY 02783-3818

Phone: +96619177651654

Job: Mining Representative

Hobby: amateur radio, Sculling, Knife making, Gardening, Watching movies, Gunsmithing, Video gaming

Introduction: My name is Chrissy Homenick, I am a tender, funny, determined, tender, glorious, fancy, enthusiastic person who loves writing and wants to share my knowledge and understanding with you.