Key Components of VC Fund Math

Only 15% of VCs understand this fund structure hack. The rest are leaving MILLIONS on the table👇 ◾️ Most VCs invest just 80-85% of the capital they raise. Why? Management fees consume the rest. On a $100M fund with standard fees over 10 years, that's $15-20M never invested in startups. That's amount that can never generate returns for LPs or carry for GPs. ◾️ The hack? Management fee recycling. Instead of distributing early exit proceeds, smart VCs reinvest them. This gets the FULL $100M working in portfolio companies - or even more. Elite firms like Foundry and Union Square Ventures aim for 110% deployment. ◾️ The math is astonishing (with 1.5% MF): - Without recycling: $85M invested needs a 4.1x multiple to achieve a 3x net return to LPs. - With recycling: $100M invested only needs a 3.65x multiple for the same 3x return. That's 11% less pressure on performance. ◾️ Think about that: you're asked to generate the SAME returns with LESS capital. Brad Feld puts it perfectly: "If an LP gives us a $1 to invest, we should invest at least that $1, not $0.85." When you frame it this way, NOT recycling seems absurd. Yet 85% of VCs still don't do this effectively. ◾️ For emerging fund managers, this is your edge. Established funds often get away with poor recycling because of their track record. You don't have that luxury. Offer better structural alignment and you'll stand out in LP conversations immediately. ◾️ What early-stage companies deserve recycling capital? - "Singles" that return 1-2x quickly. - Small positions in companies that get acquired early. - Secondary sales of promising but not rocket ship companies. Don't recycle your home runs. Let those distribute. ◾️ Fred Wilson notes they've put as much as $140M to work in a $125M fund. Think about it: they called less capital than committed ($110M) yet deployed MORE than committed ($140M)! That's the magic of aggressive recycling + smart exit management. ◾️ The typical objections to recycling: - "LPs want distributions early". - "It complicates tax planning". - "It could extend the fund life". All valid, but addressable through smart provisions in your LPA that limit timing, amount, and source of recycling. ◾️ The best LPA recycling provisions include: - Cap of 20-25% of fund size for recycling. - Limited to investment period (first 5 years). - Only from exits within 2 years of initial investment. - Clear rules on what recycling can fund (new deals vs. follow-ons). ◾️ For LPs, the key question to ask GPs: "What's your recycling strategy and how does it maximize my capital efficiency?" The answer reveals whether a GP truly understands fund construction or is just collecting fees. ◾️ The bottom line: management fee recycling is the closest thing to "free money" in venture. It puts more capital to work, reduces the required multiple for success, and aligns GP-LP interests perfectly. What do you think about recycling?

Too many founders don’t understand VC math. That’s why their pitch sounds solid… and still gets a no. Because here’s the thing: → You might have great traction → A reasonable valuation → A clear use of funds But if a VC can’t see how your company returns their fund? You're done.. Here’s what happens when you don’t understand venture math: → You pitch a ‘nice’ $50M exit… that’s a hard pass → You think traction alone is enough without scale → You wonder why VCs “ghost” after asking about ownership Here’s the simple truth: → A $100M fund needs to return $300M+ (3x is the bar) → Most firms make 20–30 bets, but only 2–3 need to win big → That means each winner has to be a $1B+ outcome → And your startup has to realistically get there with their % ownership Here’s what great founders do instead: → They model how a VC’s $1M could 10x based on current cap table → They align their vision with fund return math → They speak in ownership and outcomes, not just valuation → They show how this round sets up the next one on a clear path to scale VCs aren’t greedy. They just have to bet on outcomes that move the needle. Two things I always recommend: → Do the math: if a VC owns 10%, how big do you need to get for them to make $30M? → Ask yourself: is your vision fund-returning, or just fund-supporting? This isn’t about changing your mission It’s about learning to speak in the language investors actually use to make decisions At Capwave AI, this is the work we help founders do behind the scenes. Translating your vision into terms investors instantly understand. What’s the “win” your lead investor needs to justify their check? Have you shown them how you get there? #fundraising #venturecapital #founders #capitalraising #VCmath #investorreadiness Scale? That's what my great friend, advisor and investor Chris Halligan knows everything about. This is what we discuss and track on a weekly basis so we can get it down to a science :)

Everyone wants to start a VC fund. Few understand how the economics actually work. Let’s break it down 👇 Assumptions: – 3 GPs – 2% annual management fee for 10 years – 50% of the fees go to overhead – 20% carry – No GP capital in the fund So what does each GP (assuming 3) actually make? 📉 $10M fund, 1.5x return → ~$66.7K/year 📈 $10M fund, 3x return → ~$166.7K/year 📈 $50M fund, 3x return → ~$833.3K/year 📈 $100M fund, 3x return → ~$1.67M/year That’s average compensation over 10 years — most of the carry hits late, if at all. Here’s the reality: ➤ Small funds don’t make you rich unless you have insane returns. ➤ Carry is where the upside lives — and it’s all backloaded. ➤ LPs care more than ever about DPI and fund velocity. If you're starting a fund, ask yourself: Are you optimizing for fees? Or are you playing the long game? Because this business only works if your founders win — and your fund returns real dollars back to LPs. #venturecapital #startups #fundmath #emergingmanagers

Ever wondered why VCs are obsessed with unicorns? Imagine a $1M fund split across 10 companies at $100K each. Nine companies fail (the typical rate). One company needs to return the entire fund. If your winner does 10x ($100K → $1M), you break even. Not good enough. If your winner does 20x ($100K → $2M), you get 2x gross returns. barely beat index funds. Still not good enough. This means…. Your winner must do 100x ($100K → $10M) to deliver a 4x net fund return after dilution. This means if you invest at a $10M post-money valuation, you need a $1B+ exit to make the math work. This explains Why VCs don't care about failure rates - the number of failures is irrelevant. Only the size of winners matters 🦄 This is why venture capital is fundamentally different from every other asset class. In surgery, you want 99% success. In VC, you want one MASSIVE success that makes the other nine irrelevant. Of course, I think all my investments are great, and the founders are all exceptional.... But... The power law is the mathematical reality (!!) that explains why unicorns matter more than anything else