Fund Mechanics Advanced

Fund of Funds

A fund that invests in other VC or PE funds rather than directly in companies.

Definition

A fund of funds (FoF) is an investment vehicle that invests in multiple venture capital or private equity funds rather than directly in companies. FoFs provide diversification across managers, strategies, and vintages. They are used by smaller institutional investors who want VC exposure but lack the resources to select and manage individual fund relationships. FoFs charge an additional layer of fees (typically 0.5-1% management fee and 5-10% carry) on top of the underlying funds' fees.

Why it matters

Funds of funds are a layer removed from your company, but they are a significant source of LP capital in the VC ecosystem. Their presence increases the total capital available for startups, indirectly supporting the valuations and funding environment that affects your equity.

Example

A $200M fund of funds invests $10-20M each in 15 different VC funds across seed, Series A, and growth stages. This gives their investors exposure to hundreds of startups through a single allocation.

Related terms

Limited Partner (LP)
An investor who provides capital to a VC fund but has no management role.
Venture Capital (VC)
Professional investment firms that fund high-growth startups in exchange for equity.
General Partner (GP)
The managing partner(s) of a VC fund who make investment decisions and manage the portfolio.
Fund Secondary
When a limited partner sells their interest in a VC fund to another buyer.
Management Fees
The annual fee (typically 2% of fund size) VCs charge LPs to cover operating costs.
Carried Interest (Carry)
The GP's share of fund profits, typically 20%, which is their primary compensation incentive.

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This definition is an educational summary. It is not legal, tax, or investment advice. Specific terms in your equity grant or company documents may differ.