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.