How venture funds work

A partner at a large venture firm tells Ada that a $150M sale of Northwind is “too small.” For Ada and Ben, $150M is a very large result. Why is it too small for the firm? The answer is not in Northwind’s numbers. It is in the numbers of the firm’s fund. This lesson opens the fund and shows you how its math decides what it wants from you.

Your investors have investors

A venture capital fund is usually a limited partnership with two roles:

• The limited partners, or LPs, supply almost all the money. They are pension funds, university endowments, foundations, insurance companies, sovereign funds, family offices, and wealthy persons.
• The general partner, or GP, is the venture firm. It selects the investments, sits on boards, and gets the fees and the carry.

The LPs are “limited” because they do not select investments, and they can lose only the money that they put in. The GP also puts in some of its own money, the GP commitment. In the Carta Fund Economics Report 2025, the median GP commitment was 1.7% of the fund. In a $100M fund, the GP puts in $1.7M and the LPs put in $98.3M.

The LPs do not send all their money on the first day. They promise an amount, the committed capital, and the GP sends a capital call when the fund must pay for an investment. The money that the LPs actually sent is the paid-in capital.

The 2 and the 20

A fund pays its GP in two ways. Investors call the usual terms 2 and 20: a 2% fee each year and 20% of the profit.

The management fee

The management fee pays for salaries, the office, and travel. It is a percentage of the committed capital, not of the profit, so the GP gets it with or without a profit. The Carta Fund Economics Report 2025 gives these values for funds from 2018 to 2025:

• The median fee is 2% each year during the investment period, the years in which the fund makes new investments.
• The median investment period is 5 years.
• 81.9% of funds lower the fee after that period. The median fee is 1.9% after the first step-down and 1.8% after the second.

A 2% fee sounds small, but it comes every year. This example uses a $100M fund with the Carta median rates. The rates for years 9 and 10 are assumptions:

Years 1 to 5   2.0% × $100M × 5 years = $10.0M
Years 6 to 7   1.9% × $100M × 2 years =  $3.8M
Year  8        1.8% × $100M           =  $1.8M
Year  9        1.6% × $100M           =  $1.6M
Year 10        1.4% × $100M           =  $1.4M
Total fees                            = $18.6M

With fund expenses of approximately 1%, only approximately $80.4M of the $100M goes into companies. In real data, Carta found that the median 2017 fund spent 19% of its committed capital on fees and expenses in its first eight years. Many funds also use the money from early sales for new investments, so they can invest more than the fund less the fees.

Carried interest

Carried interest, or carry, is the GP’s share of the profit, usually 20%. The GP gets carry only after the LPs get all of their money back. On Carta, the median carry was 20% for funds from 2018 to 2025. Some top firms charge 25% to 30%. A hurdle, a minimum return for the LPs before carry starts, is rare in venture capital. Only 9.5% of funds of $1M to $10M and 12.4% of funds of more than $100M have one.

LPs pay in                     $100M
The fund gives back            $300M
Profit = $300M − $100M       = $200M
Carry  = 20% × $200M         =  $40M
LPs get = $300M − $40M       = $260M, a net multiple of 2.6x

The net multiple is what the LPs get back after fees and carry, divided by what they paid in. The gross multiple is the same ratio before fees and carry.

Why LPs want 3x, and what that means for the companies

LPs put money into venture funds for 10 years or more. They can lose all of it, and they cannot take it out early. For that risk, they want a large return, and 3x net is a common target. Fees and carry sit between the companies and the LPs, so the companies must return much more than 3x.

Worked example · step 1 of 5

What the companies must return for 3x to the LPs

1. 1

   The fees come out first

   To keep the math simple, the fund charges 2% for all 10 years. Thus $20M of the $100M goes to fees.

   Fees     = 2% × $100M × 10 years = $20M
   Invested = $100M − $20M          = $80M

Show step 2Show all steps

Now change the terms yourself. Move the fee, the carry, and what the companies return. Look at the gap between what the companies return and what the LPs get.

Simulator

Where the fund's money goes

The LPs pay in the fund. The GP takes fees, invests the rest, and takes carry on the profit. Change the terms and the result.

Fund size

$100M

Management fee each year

2%

Carried interest

20%25%30%

What the companies return

3x

A multiple of the money that the fund put into companies.

Years until the LPs get the money back

10

Put into companies

$80M

after $20M of fees

The GP gets

$48M

$20M fees + $28M carry

The LPs get back

2.12x

$212M

IRR for the LPs

7.8%

a year, over 10 years

The money, step by step

LPs pay in

$100M

Fees to the GP

$20M

Into companies

$80M

Companies return

$240M

Carry to the GP

$28M

LPs get back

$212M

The companies return 3x the $80M invested, or $240M. The LPs first get back their $100M. The GP then takes 20% of the $140M profit, which is $28M. The LPs end with $212M, a net multiple of 2.12x.

To give the LPs 3x after fees and carry, the companies must return 4.38x the money invested. Over 10 years, 2.12x is only 7.8% a year.

Fund life and reserves

A fund has a fund life of approximately 10 years by design. It makes new investments in approximately the first 5 years. In the other years, it puts more money into its winners and sells its stakes. Most fund agreements let the GP extend the fund, usually with two one-year extensions.

In practice, funds last longer. In older industry data on more than 100 tech funds, the median fund took a little more than 14 years to end. Only 7% ended within 10 years, and 46% took 15 years or more. In December 2024, PitchBook reported that LPs now think that a 10-year fund will continue for 11 or 12 years.

The year in which a fund starts to invest is its vintage year. Investors compare funds of the same vintage, because those funds invested in the same market.

A fund does not spend all its money on first checks. It keeps reserves to buy more of its winners in later rounds. The right amount is a choice. In a 2019 simulation, AngelList found that a seed investor who never invests again gets a higher median result. An investor who always invests again gets a higher average result. The differences were small.

The report card: DPI, TVPI, and IRR

LPs measure a fund with a few ratios. Each ratio divides by the paid-in capital, the money that the LPs actually sent:

• DPI (distributions to paid-in) is the cash that the fund gave back.
• RVPI (residual value to paid-in) is the reported value of the stakes that the fund continues to hold. This value is on paper.
• TVPI (total value to paid-in) is DPI + RVPI.
• IRR (internal rate of return) is the return each year, with the date of each payment in and out.

LPs paid in            $80M
Cash given back        $40M      DPI  = $40M ÷ $80M  = 0.5x
Value of the stakes   $120M      RVPI = $120M ÷ $80M = 1.5x
                                 TVPI = 0.5x + 1.5x  = 2.0x

On paper, this fund doubled the LPs’ money. In cash, it gave back only half. That gap is why LPs ask about DPI.

IRR adds time. For one payment in and one payment out, IRR = multiple^(1 ÷ years) − 1. The same multiple gives a much lower IRR if it takes longer:

3x in  5 years   IRR = 3^(1/5)  − 1 = 24.6% a year
3x in  7 years   IRR = 3^(1/7)  − 1 = 17.0% a year
3x in 10 years   IRR = 3^(1/10) − 1 = 11.6% a year

In the first years of a fund, the LPs pay the fees, but the companies continue to show their purchase price. Thus the return starts negative and increases only later. The line on a chart looks like the letter J, so investors call it the J-curve.

Work it out

LPs paid $60M into a fund. The fund gave back $15M in cash and holds stakes with a reported value of $105M. What is the TVPI?

Your answerCheck

What the fund wants from your company

Venture returns depend on a few very large winners. The next lesson shows why. Thus a fund wants each investment to have a real chance to be a fund returner. A fund returner is one company whose sale alone gives back the full fund.

Exit that returns the fund = Fund size ÷ Fund's ownership at the exit
                           = $100M ÷ 10%
                           = $1B

The fund’s ownership at the exit is less than the stake that it buys, because later rounds dilute it. A fund that buys 15% at seed and does not invest again owns less after each round. With the Carta median dilution for Q2 2026, 18.7% at Series A and 13.4% at Series B, the math is:

Ownership after Series B = 15% × (1 − 18.7%) × (1 − 13.4%) = 10.56%
Exit that returns a $100M fund = $100M ÷ 10.56%              = $947M

Predict first

A $500M fund owns 10% of Northwind when Northwind sells for $150M. What part of the fund does that sale give back?

Type a guess before you continue. A guess first, even a wrong one, makes the answer easier to remember.

Your guessSave my guess

Try it with your own numbers. Change the fund size, the stake, and the later rounds, and then set a sale price that you think is realistic for your company.

Calculator

The exit that returns the fund

A fund buys part of a company at seed. Set the fund size, the stake, and the later rounds. See how large the sale must be.

Fund size

$100M

Stake that the fund buys at seed

15%

The sale price of your company

$200M

Later rounds before the exit

01234

Series A and Series B, at the median dilution.

Fund owns at the exit

10.56%

15% at seed

Exit that returns the fund

$946.89M

$100M ÷ 10.56%

Your exit returns

21% of the fund

$21.12M to the fund

The fund buys 15% and does not buy more. Series A and Series B dilute it to 10.56%: 15% × (1 − 18.7%) × (1 − 13.4%). To get its $100M back from this one company, the company must sell for $946.89M.

A $200M sale pays the fund $21.12M, which is 21% of the fund. That is a good result, but the fund must find a larger winner somewhere in its portfolio.

Exit that returns the fund, at 10.56% ownership

$25M fund

$236.72M

$100M fund

$946.89M

$500M fund

$4.73B

$2B fund

$18.94B

The size of the fund also decides how much the fund must invest to get its target stake. In Q2 2026, the median seed post-money valuation on Carta was $23.9M. To own 10% at that price, a fund must invest $2.39M. A fund that can write only $800K checks gets 3.3%. When seed prices increase, a small fund must accept less ownership, write fewer and larger checks, or invest earlier.

A $250,000 check returned $120M. Did it return the fund?

That depends on the fund. In one well-known case, a $250,000 seed check for 12% of a company became $120M when the company sold for $1B. That was almost 2 times the total of the investor’s first three funds, which were $70M together. For a $250M fund, the same $120M is less than half of the fund.

Quiz · question 1 of 6

Test what you learned

A $200M fund charges a 2% management fee during a 5-year investment period. How much does the GP get in fees in those five years?

• A2% of the profit, so it depends on the returns
• BNothing until the fund makes money
• C$20M in total
• D$4M in total