Let's look at the two ways that the GPS in a VC fund make money.

The typical fee structure of VC funds is known as the 2 and 20 with the 2% referring to the management fee and the 20% referring to the profits generated from their invested Port-Cos. Sometimes for the most successful VC funds with stellar track records, their fee structure increases to 2 and a half and 30.

A management fee is defined as what the VC fund charges each of its LPs for investing their capital and managing their investments. VC funds will typically charge their LP investors 2% per year of their total committed capital in the VC fund. Sometimes it can be a little higher in different markets or industries. There can be a certain amount of cyclicality in the fee setup, depending on market conditions, and also regional variations may be applicable. Looking at an example for a VC fund with $100 million total capital on a 2% management fee, the GPs in the VC fund would earn $2 million per year to pay salaries and other operating expenses. For example, travel office expense, accountants, et cetera, associated with managing the VC fund. So that's $100 million times 2%, which gives us a $2 million per year management fee. The 2% management fee is typically paid over the active investment period, which is usually a three to five year timeframe. Once the capital has been fully allocated, the management fee is still paid, but the 2% fee may decrease each year by 25 basis points or some other amount. This is referred to as the step down.

A carried interest aka the carry or performance fee is defined as what the GPs earn from their portion of the VC fund's. Profit sharing of the port-co's exit valuations. Carried interest is only paid on exits, and it is typically paid after each specific exit. For example, if a VC fund earns a 20% carried interest on their $100 million LP fund, the GPs will receive 20 cents on every dollar earned over 100 million. If the VC fund returns $300 million from the exits of all their port-cos, then the GPS would earn $40 million. That's the $300 million return minus the a hundred million dollars original investment. So that gives us $200 million times 20%, which equals $40 million in carried interest.