Diving into Data: What Fund Terms are Emerging Managers Using?

Executive summary:

For first-time fund managers, it’s best to keep things simple and move quickly. Irregular terms and operational complexity related to deployment can take focus away from the core value of an emerging fund manager: to invest in great founders. Given the benefits of keeping things simple, there is a consolidation of Limited Partner Agreements around some basic best-practices. 

A two-percent management fee during the deployment period of the fund and twenty-percent carry remain standard. This also applies to micro-fund managers who are not full-time investors, given that there are operational costs related to deploying capital which warrant the two-percent fee. After a short deployment period, (typically three years or fewer for small funds) it is typical to lower management fees as costs associated with running the fund (such as deal sourcing and diligence) have decreased. Twenty-percent carry remains an industry standard and ensures alignment between managers and limited partners. 

Unlike management fee and carry data, minimum commitment requirements vary widely, from $1K to $400K - but $10K emerges as a strong median. Minimum requirements in small funds are often flexible and, in some cases, are adjusted on a case by case basis.



Key takeaways:

  • Most of the managers in this data sample are first-time VC fund managers

  • The average fund size is ~$5M

  • 2% management and 20% carry remains standard

  • A deployment period of less than 3 years is most common

  • Most funds decrease management fees after deployment 

  • Minimum commitments as low as $10k are normal



First-Time Managers

This data set is largely comprised of first-time fund managers who are successfully raising on Sydecar. Supporting first-time managers and ultimately increasing participation in private markets is at the core of our mission. Even if you aren’t a first-time manager yourself, this report provides meaningful context to understand the private market landscape today.

  1. If you are a first-time manager, or considering becoming one, this data is invaluable. Getting in front of limited partners with terms that you’re confident in is an important step in making your first fund a reality.

  2. For a limited partner considering a fund investment, this data allows you to understand what terms are standard. Odd terms can be an easy flag in initial diligence.

  3. For a founder who might raise from emerging managers, seeing the fundraising dynamics on the other side of the curtain allows you to glimpse into what motivates investors. VCs raise in a similar way to founders; first-time fund managers benefit from keeping terms simple and moving quickly in the same way early-stage founders do.



Average Fund Size


The average fund size is ~$5M, but there is a wide range of fund size targets, from $500k to over $25M. Ultimately, targets and reality can differ, but it is important to build your fund size off of your investment strategy. How many checks do you want to deploy? Over what period of time? How much of each company you invest in are you hoping to own? How big will your target check be given target stage valuations?

There is a long list of questions that should inform your target fund size. Outside of the model and best laid plans though, there’s the reality of how much you can raise. Maybe your target is $10M, but you can only realistically raise $5M.

One of the biggest benefits of the Fund+ tool and modern fund infrastructure in general is the flexibility. Up until recently, there was a much higher minimum AUM needed to even support the legal fees required to launch a fund. Given this new dynamic, we see first time managers leaning towards smaller first funds,allowing them to fundraise faster and build their track record quickly.



2% management and 20% carry remain standard

To understand the 2% management fee, it can be helpful to consider the average fund size of $5M and work backwards. 2% of $5M is $100K. Divided by 12 months in the year brings us to ~$8K per month. Assuming legal fees associated with the fund to be around $3k per month  a manager might be left with $5K per month to spend on other operational and management costs, such as marketing, portfolio support, and any non-standard reporting requirements.

As previously mentioned, first-time fund managers often are not working on the fund full time. Given the $5K per month management fee, even if they are working on the fund full time, they are most likely not taking any form of salary. This $5K is most commonly used for software products related to sourcing, tracking, and engaging with potential founders. 

We share all of this to explain that management fees are common and appropriate despite some of the bad press they have gotten in the media surrounding mega-funds ($1B+) where Partners can earn $500K+ a year.


Unlike mega-fund managers who may live luxurious lifestyles through management fees, first-time managers aligned with limited partners through the standard 20% carry term. This continues to be industry standard and is viewed as the price of actively deployed funds across private markets.



Deployment Period and Front-Loaded Fees 


Venture capital funds typically deploy over the course of three to five years. The size of the fund and the length of the deployment period are typically correlated. Large funds deploy slowly. Small funds deploy quickly.


This lines up with what we see in our data set. Given that the average target fund size is $5M (small within the context of the broader VC market), it is not surprising to see a large percentage of funds being deployed in three years (46%) or less (45%). This is driven by a couple of simple factors:

  1. There is less money to deploy. If an investor is writing $250K checks out of a $5M fund, they will deploy into 20 companies. At a reasonable pace of around one check per month, an investor wouldu deploy their full fund in less than two years. If the fund was bigger, even if the investor is writing bigger checks, it takes time to deploy the capital effectively.

  2. Small funds often have a narrower thesis. Whether the manager is focused on a specific thesis, sector, or network, the smaller the fund, the faster the deployment will be in a small coverage area.



Smaller funds will typically decrease management fees after the deployment period ends. This is because the work associated with the fund has also decreased. This is unlike larger funds who may track investments and follow on to fight against dilution in later rounds over long periods of time. Small funds typically have a tight deployment window s and do not reserve capital for follow on.



Minimum Commitments


Although the median commitment minimum in our sample is $10k, representing approximately a third of the funds in our data set, the range is wide. We saw minimums as low as $1K and as high as $400K.


Minimum commitments for first-time managers are often flexible as they experiment with going to market and establishing their investor base. That said, given investor limits and the effort required to close each incremental limited partner, managers are often encouraged to set a minimum of around $10K.


IIt is not uncommon for managers to have a legal minimum written into their Limited Partner Agreement that is lower than what they target. Minimums can serve as an anchor when discussing a raise with a potential LP and often will end up being the median commitment for the fund. With those dynamics in mind, having a legal minimum of $10K while orienting around a $25K minimum target is common.



Thinking back to our $5M fund:

Raising only $25K checks would result in 200 LPs

Raising only $10K check would result in 500 LPs


Funds are typically limited to 99 LPs. This gives you a window into the fact that although the minimum might be $10K or $25K, managers will need some larger LPs to make the seat limit feasible.



Summary


It is in the best interest of first-time managers to keep limited partner agreements simple. Simple terms allow fundraising managers to spend more time pitching their ability to identify high quality founders and less time explaining fees. As seen through our data, best practices are as follows:

  • 2% management fees charged annually during fund deployment and decreased post deployment.

  • 20% carry charged on the fund returns.

  • $5M or less is a reasonable first fund size target.

  • $10K minimums are standard, but the average check will have to be higher in order to meet targets given 99 LP limit.