Management Fees
The annual fee (typically 2% of fund size) VCs charge LPs to cover operating costs.
Definition
Management fees are the annual fees charged by the GP to LPs, typically 2% of committed capital during the investment period and sometimes stepping down to 1.5-2% of invested capital afterward. These fees cover the VC firm's operating costs: salaries, office space, travel, and legal costs. Management fees are charged regardless of fund performance. Over a 10-year fund life, a 2% fee on a $500M fund totals roughly $85-100M.
Why it matters
Management fees reduce the effective capital available for investment. A $500M fund with 2% fees over 10 years spends $85-100M on fees, leaving $400-415M for actual investments. This fee structure is standard but has been criticized for reducing LP returns.
Example
A VC raises a $300M fund. Annual management fee is 2% = $6M/year. Over 5 years of the investment period, the firm collects $30M in fees. This pays for 10 investment team members, analysts, an office, and operational costs.