This installment of how VC funds work illustrates a basic offshore venture capital fund structure for a fund that will make investments predominantly outside of the US (for example, China). Typically, we form these type of funds in the Cayman Islands due to its similarity with Delaware law and for tax planning purposes.
In this installment of how VC funds work, I'm illustrating a basic venture capital fund structure. As you'll see, even a basic venture capital fund organizational structure often uses at least a few entities, for a variety of business and tax planning purposes.
This is for an entirely US-based fund. For a sample Cayman Islands structure for a non-US fund, please see my offshore fund chart.
One question that I’m often asked is how the expenses and fees break down in a typical VC fund structure. Typically, a VC fund will have three categories of charges (aside from profits or carried interest): organizational expenses, fund expenses and management fees. This post is a rough overview, based on my experience, of how costs are categorized in those groups and paid by a typical fund. These categories also control whether the expenses generally are paid by fund managers (out of fees) or by fund investors (as expenses).
Notwithstanding the recent economic climate, investment fund managers are once again actively working to setup new investment funds. The type of funds that we’re helping launch now are admittedly different than those we helped launch during the 2005 to 2008 expansion years. In general, funds are now being formed with less capital and many have a more specialized investment mandate than previously used. I’m now often seeing new fund managers entering the space by differentiating themselves from the norm in terms of the types of investments that they’re going after (e.g., revenue based lending, seed financings, etc.). The opportunities in the marketplace for these new types of funds are bringing in new fund managers with unique skill sets who could be hugely successful in this new landscape. Often, these new investment professionals, being from different markets than traditional VC investing, need to ramp up quickly in understanding the fund formation market.