How Venture Capitalists Structure Deals (And Make Money)
You always hear about VCs throwing millions at startups. But how do they actually make money? And what does the math behind a venture fund look like?
Let’s break it down and show you where the profits go.
First: What Is a VC Fund?
A VC firm usually raises money from outside investors (called LPs, or limited partners) and they take the money they get from these investors and put it into a pool of money which is called the fund. Lets say the VC firm raises 100M.
The VC firm (aka the GP, or general partner) uses that $100M to invest in early-stage startups, hoping a few grow 10x+.
They don’t just throw money around they get paid to manage, and paid when things go well.
Where the Money Goes: VC Fund Structure
Let’s walk through how a $100 million fund typically works.
Step 1: Management Fees
The GP usually takes a 2% annual fee to run the fund:
$2M/year × 10 years = $20M in management fees over the fund’s life
Used for salaries, operations, sourcing, support
This comes out of the fund, so only ~$80M–$85M ends up getting invested into startups.
Step 2: Preferred Return to LPs (the Hurdle)
Most funds have an 8% preferred return, or hurdle rate, for LPs.
This means LPs get the first 8% annual return before the GPs earn any profit share.
(LPs always get paid first because they take the capital risk.)
Step 3: Carried Interest (The Profit Split)
After LPs get their 8% return back, the rest of the profits are split:
80% to LPs
20% to GPs (this is called carry which is the real money-maker for VCs)
So if a $100M fund returns $300M:
LPs first get back $100M (original capital)
Then they get ~$80M (approximate 8% hurdle compounded)
Then the remaining $120M profit is split:
$96M to LPs
$24M to GPs (this is where VCs get rich)
Visual Breakdown of a $300M Fund Return
Why This Structure Works
LPs get priority: They take most of the risk, so they get paid first.
GPs are incentivized: They only get carry if they perform above the hurdle.
Everyone wants a unicorn: A single big win (like a $1B exit) can make the whole fund work.
Final Thought
Venture capital looks flashy — but underneath is a very structured waterfall of who gets paid and when.
If you want to start your own fund, or just understand where the incentives live, start with this:
LPs get their money back first. GPs get rich after results.
And the best VCs? They’re not just betting on startups. They’re betting on compounding returns just like you.
-- EV