How a VC Fund Makes Money: 2 and 20

Last updated: 31 October 2026

A VC fund makes money through an annual management fee on committed capital and a share of profits called carried interest. Investors provide capital; the manager invests it and earns fees and profit share.

What does “2 and 20” mean?

“2 and 20” is shorthand for the standard VC fee model: a 2% annual management fee on committed capital plus 20% carried interest on profits. The management fee is charged on the money investors have promised, not only on cash already invested. Carried interest is the manager’s share of profit after investors get their capital back and any hurdle is met. According to Carta’s fund economics report, the median management fee in the investment period is 2% and the median carry is 20% across recent vintages. These are medians, not fixed rules, so individual funds can differ. The phrase matters because it separates two very different income streams: fees are relatively steady, while carry depends on strong exits.

How do management fees work?

Management fees are paid every year regardless of performance, to cover salaries and costs. Over a 10-year fund life, fees typically consume 15–20% of committed capital. That means a share of the committed money pays for running the fund rather than going into companies. Take a £100m fund charging 2% a year: that is £2m a year, or £20m over 10 years if charged flat on commitments. This is a worked example, not a claim about every fund. The fee gives the manager a predictable revenue base while it searches for and supports companies.

What is carried interest and the hurdle rate?

Carried interest is the manager’s share of profit; the standard level is 20%. It is only earned if the fund makes a profit above returned capital. The hurdle rate, also called the preferred return, is the minimum annual return investors must receive before the manager earns carry; it is typically 8% compounded. Many venture funds have no hurdle, so it should be described as common rather than universal. A simplified worked example ignores the hurdle and fee recycling: if a £100m fund returns £240m, profit above returned capital is £140m; carry at 20% is £28m; limited partners receive £212m. This example shows why carry is powerful for the manager and why investors care about the order of payments. In practice, waterfall terms can be more complex.

What is the J-curve?

The J-curve describes the shape of early fund returns. In the early years, limited partner returns are negative because fees and capital calls come before exits. The fund spends money on investments, salaries and costs, while companies need time to grow. Later, as portfolio companies are acquired or listed, returns can recover and rise. The curve dips first and then climbs, hence the name.

Where does a fund’s money come from and go?

Limited partners, such as pension funds, family offices, funds of funds and wealthy individuals, commit capital; the general partner draws it down over time as investments are made. The money goes into portfolio companies. Returns come from exits, such as acquisitions or IPOs, and a few big winners drive results.

Item	Typical figure
Management fee	2% a year
Carried interest	20%
Hurdle rate	typically 8% compounded
Fees over 10 years	15–20% of committed capital

Frequently asked questions

What is “2 and 20” in venture capital?

It means a 2% annual management fee on committed capital plus 20% carried interest on profits. The fee supports running the fund, while carry rewards successful investing.

Are management fees paid even if the fund loses money?

Yes. Management fees are paid every year regardless of performance, to cover salaries and costs. That is why they can consume 15–20% of committed capital over a fund’s life.

What is a hurdle rate?

A hurdle rate is the minimum annual return investors must receive before the manager earns carried interest. It is typically 8% compounded, but many venture funds have no hurdle.

Why do VC fund returns look bad early on?

Early returns are often negative because fees and capital calls come before exits. This is the J-curve, and returns may recover as portfolio companies exit.

Where does a VC fund’s money come from?

It comes from limited partners, such as pension funds, family offices, funds of funds and wealthy individuals. They commit capital, which the general partner draws down over time.

Sources

Figures and prices were checked on 31 October 2026; check the linked sources before relying on them. This article is general information, not tax, legal or investment advice.