Incentive Structures in Venture Funds: LPs vs. GPs

Venture funds are primarily powered by two key participants: Limited Partners (LPs) and General Partners (GPs). Each has distinct roles and incentives.

Limited Partners (LPs)

Role: Investors in the fund, providing capital for investments.

Incentives:

• Capital Returns: Earn returns from portfolio exits and distributions.
• Preferred Return: Often, LPs have a “hurdle rate” ensuring they receive a minimum return before GPs take their profit share.

General Partners (GPs)

Role: Managers of the fund, making investment decisions and managing portfolio companies.

Incentives:

• Management Fees: Typically 1.5% to 2.5% of the fund’s total assets or committed capital.
• Carried Interest: A share of the fund’s profits, usually around 20%, earned after LPs get their preferred return.
• Co-investment: GPs sometimes invest their own money alongside LPs, aligning interests further.

In essence, while LPs are driven by potential returns, GPs are incentivized through management fees and a share in profits.