The way Venture Capital funds make money are two fold: via management fees and carries (carried interest).
- Management fees: management fees are usually defined as the ‘cost of having your assets professionally managed’. How does this translate into the Venture Capital industry? VC funds typically pay an annual management fee to the fund’s management company, as a form of salary and a way to cover organizational and fund expenses. Management fees are usually calculated on a percentage of the capital commitments of the fund, or about 2 to 2.5 per cent.
- Carried interest or carry: share of the profits of an investment or investment fund that is paid to the investment manager in excess of the amount that the manager contributes to the partnership. This is the way Wikipedia defines what a carry is. In plain English: when an investment is successful, a carry represents the share of the profits that is paid to the fund managers. Carried interesting in Venture Capital is usually 20 to 25 per cent, meaning that while 20% of the profits go to the general partners, 80% belongs to the limited partners.