Fund Structure
What is a fund of funds?
Quick Answer
A fund of funds (FoF) is an investment vehicle that invests in multiple VC funds rather than directly in companies. FoFs provide LP diversification across managers, vintages, and strategies, and are common entry points for institutions new to VC.
Detailed Answer
A fund of funds is a pooled investment vehicle that allocates capital to a portfolio of venture capital funds, providing diversification and professional fund selection.
How it works: 1. FoF raises capital from LPs (pension funds, endowments, family offices) 2. FoF team evaluates and selects 15-30 underlying VC funds 3. FoF commits capital as an LP in each selected fund 4. Returns flow: companies → VC funds → FoF → FoF LPs
Advantages: - **Diversification** — Exposure to 200-500+ companies across 15-30 funds - **Access** — FoFs can get into top-tier funds that are closed to new LPs - **Expertise** — Professional fund selection and due diligence - **Vintage diversification** — Spread across multiple fund years - **Smaller minimums** — LPs can access VC with $1M-$5M (vs. $10M+ direct)
Disadvantages: - **Double layer of fees** — FoF charges ~1% management fee + 5-10% carry, on top of the underlying fund's 2/20 - **Lower returns** — The extra fee layer reduces net returns by 2-4% - **Less control** — No choice in individual company investments - **J-curve amplified** — Longer time to first distributions
Notable FoFs: HarbourVest, Adams Street, Greenspring (now StepStone), Hamilton Lane
Who invests in FoFs: Smaller institutions, corporate pensions, family offices new to VC, international investors seeking US VC exposure.
Related Questions
What is venture capital?
Venture capital is a form of private equity financing where investors provide capital to early-stage, high-growth startups in exchange for equity ownership, typically expecting 10x+ returns over 7-10 years.
How do venture capitalists make money?
VCs make money through two streams: management fees (typically 2% of fund size annually, covering operating costs) and carried interest (typically 20% of fund profits above a hurdle rate, which is where real wealth is built).
What is carried interest in venture capital?
Carried interest (carry) is the share of investment profits — typically 20% — that fund managers (GPs) earn as performance-based compensation after returning LP capital plus a preferred return (usually 8%).
How do you raise a venture capital fund?
Raising a VC fund involves establishing a legal entity (LP structure), defining your thesis and target fund size, building a track record, creating fundraising materials (PPM, pitch deck), and securing commitments from LPs over 6-18 months.