How VC Funds Work
What is a fund of funds in venture capital?
A fund of funds (FoF) is an investment vehicle that allocates capital to multiple VC funds rather than directly into startups. It gives LPs diversified exposure to the VC asset class with smaller minimums, but adds an extra layer of fees.
A fund of funds pools capital from investors and deploys it into a portfolio of VC funds, rather than directly into startups. It's a way to invest in the venture asset class through a diversified basket of managers rather than betting on a single fund.
FoFs are commonly used by smaller institutional investors — community foundations, smaller endowments, family offices — who want VC exposure but don't have the scale to build relationships with multiple top-tier funds on their own. They also help smaller LPs meet the high minimum commitments that top VC funds often require.
The tradeoff is fees. FoF investors pay two layers: fees on the FoF itself (typically 1% management fee + 5–10% carry) and the underlying fund fees (2% + 20%). That fee drag meaningfully reduces net returns.
FoFs also serve as talent pipelines. Some FoF analysts go on to join portfolio funds or start their own vehicles. And for new or emerging managers, getting a FoF as an LP can be a signal of legitimacy.
Notable FoFs in venture include HarbourVest, Horsley Bridge, and Industry Ventures.