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Aug 3, 2008

Venture Fund Economics

Venture Fund Economics

When I write about venture fund returns, there are always comments and questions that lead me to believe that the economics of a venture fund are not well understood. And since most of the readers and commenters on this blog are people who work in the startup ecosystem, I think its important that the economics are better understood. So I am planning on some posts on this topic in the coming weeks.

The first thing I'd like to tackle is how returns are calculated and why the reported returns are often higher than people might think...

Venture Fund Economics: Gross and Net Returns

The comments on my initial post on this topic went right at the VC's compensation - management fees and carry - and their impact on returns. So at Ken Berger's suggestion, I will change my planned post for today and address the issue head on.

The returns venture firms get on their investments are called "gross returns". I didn't mention them in my post yesterday because I wanted to focus on the "net" returns to the LPs. I said 2x was the lowest attractive return on a venture fund and I meant net to the LPs. That means if you invest a dollar in the fund, you get two dollars back...

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