Budgeting the Management Company of a Venture Capital Fund

How to model a management company

Modeling a management company is straightforward compared to modeling the fund:

• Revenues — the fund's forecasted management fees.
• Expenses — mostly people. Management companies are small (partners, associates, analysts, ops), plus typical operating expenses: rent, utilities, insurance, marketing, travel, computers, accounting. See VC Lab's typical management company expenses.
• Cash shortfalls — covered by the members of the management company (they invest or contribute cash if fees don't cover expenses).
• Carried interest — typically not budgeted to cover operating expenses. Distributed per individual agreements.

A common issue: after the investment period ends and management fees decline, the management company forecast goes negative. Fixes:

• Assume a follow-on fund managed by the same company, showing new management fees.
• Show management company expenses decreasing over time.

This isn't usually a real problem — managers typically raise another fund to cover any shortfall.

The Venture Capital Model and Venture Capital Model, Quarterly include management company budget sheets. The same sheet can be added to any venture capital fund model.

Background

A management company manages the venture firm's activities. Common question from emerging managers: how the entities are structured.

How a VC fund is organized

• A venture capital fund is a business entity — typically a limited partnership in the USA — that pools capital from LPs to invest in companies.
• The fund pays management fees to the GPs to run the fund.
• The fund also bears organizational expenses (legal formation, typically capped in the LPA) and operational expenses (fund admin, tax, audit, legal — typically uncapped but incentivized to keep low, since they reduce investable capital).

What's paid by the fund vs the management company: VC Lab, Managing Fund Expenses for Venture Capitalists.

How a management company is organized

• Usually a single- or multi-member LLC in the USA, managed by the GPs. Separates firm operations from fund operations. See A Guide to Management Companies.
• May manage multiple funds over the firm's life.
• Earns management fees from the fund — typically 1.5% to 2.5% of committed capital, charged quarterly over the fund's ~10-year life.
• LPAs typically allow the fund life to extend (1-2 years), usually without management fees during the extension.
• Primary expense is salaries — partners, associates, analysts, ops.
• Rolling funds work differently as fees scale with the fund. See How to Make a Budget for a Rolling Fund.
• Management companies also receive carried interest, typically 20-25% of the fund's profit after returning invested capital to LPs. ("2 and 20" = 2% fees + 20% carry.) More: modeling proceeds, distributions, and waterfall.
• Management companies may use a dual-vehicle structure for fees and carry. Doesn't affect budgeting, but matters for legal and tax.

AngelList fundamentals: The Basics of Venture Capital Management Companies.

Fee structures

"2 and 20" is shorthand. The 2% can be calculated three different ways, and each lands differently for LPs and the management company.

On a committed capital basis, fees equal the fee % multiplied by total committed capital, held flat from day one. Predictable for the management company; LPs pay fees on undeployed capital. Most common for first-time emerging managers. On a called capital basis, fees equal the fee % multiplied by cumulative called capital. It starts small and grows as capital is called, offering better LP alignment, though the management company's early-quarter cash depends on deployment pace. On an AUM (invested capital) basis, fees equal the fee % multiplied by current invested capital, net of write-offs and exits. Most LP-aligned, but it creates a circular reference (fees depend on invested capital, invested capital depends on fees) that requires iterative calculation. Common in PE, uncommon in venture.

Where fees live in the VC Model

On Get Started in the Venture Capital Model:

• D9. Total Committed Capital (default $25M)
• D13. Management Fees % per year (default 2%)
• D17. New Investment Period in quarters (default 16 = 4 years)
• D18. Management Fees period in quarters (default 40 = 10 years)
• D19. Fund Operations period in quarters (default 46 = 11.5 years)
• D20. Extension period in quarters (default 6 = 1.5 years)

The shipped model calculates fees as D13 × D9, held flat across the fee period. That's a committed-capital structure with no step-down: the easiest to underwrite and the most common starting point for emerging managers.

To change the structure, edit the fee formula on the Forecast sheet where it pulls D13 each quarter. Point the multiplier at cumulative capital called through the current quarter for called capital, or at current invested capital from the portfolio construction section for invested capital. For AUM, you'll also need to enable iterative calculations in the spreadsheet to handle the circular reference.

Step-downs

Fees often step down after the investment period ends: higher during deployment, lower while managing the tail. Defaults are illustrative; negotiate the specifics in the LPA.

The shipped model holds the rate flat. To add a step-down, replace the flat fee formula on Forecast with an IF that uses one rate through the investment period (quarter reference at D17) and a lower rate after. The quarterly VC model works the same way.

Modeling scenarios

The VC Model has three scenario pairs (Get Started, Scenario 2 Get Started, Scenario 3 Get Started), each with its own Forecast. A useful side-by-side: Scenario 1 on committed basis with no step-down, Scenario 2 committed with step-down, and Scenario 3 called with step-down.

Compare lifetime fees, net multiple, and net IRR on the Scenarios sheet. The deltas are the negotiation.

Cross-references

Recycling covers how recycled proceeds interact with called capital and fees. Performance Metrics covers how fees flow into net multiple, net IRR, DPI, and TVPI.

Switch the fee basis on Get Started and the management company's cash flow updates on this sheet. For called or AUM structures, the early quarters are where the cash gap shows up.