The capital structure: LPs and GPs
A VC fund has two classes of participant. Limited Partners (LPs) are the capital providers: university endowments, pension funds, family offices, sovereign wealth funds, and fund-of-funds. They commit capital to the fund — say, $300M — which the GP draws down over time through capital calls. LPs are passive; they don’t make investment decisions and have limited liability.
General Partners (GPs) manage the fund: source deals, lead investments, serve on boards, and decide when to sell. They typically commit 1–3% of the fund themselves (the GP commit) — a legal requirement in most jurisdictions that aligns their personal incentives with LP outcomes. A GP who has $3–9M of personal capital in the fund is genuinely motivated to produce returns, not just to deploy capital.
The J-curve: why funds look bad before they look good
In the early years of a fund, capital is being deployed and management fees are being charged — but no exits have occurred. Portfolio companies are marked at cost or at modest step-ups. The fund’s net asset value is typically below invested capital for the first 3–5 years. This period is called the J-curve: performance looks negative before it inflects upward as markups and eventually exits arrive. LPs expect the J-curve; they price the illiquidity of the early years into their return expectations. As a founder, this means your early-stage investor’s existing fund may be in J-curve when they invest in you — they need capital returned, not just paper marks.
Management fee: what it actually pays for
The standard management fee is 2% of committed capital per year — but the mechanics matter. On a $300M fund, that’s $6M per year for 10 years, or $60M in total fees over the fund life. This sounds large until you account for what it covers: GP salaries, junior team compensation, legal and accounting costs, office, travel, and fund operations. Most management fees shift from committed capital to invested capital (or step down in percentage) after the investment period ends — typically year 5 — because the fund has finished deploying. A partner at a $300M fund is drawing a market-rate salary from management fees, not getting rich from them. GPs get rich from carry.
Carry: how GPs actually make money
Carry (carried interest) is the GP’s share of profits — typically 20% of returns above the LP’s invested capital. In a fund with a hurdle rate (preferred return), the LP must first receive an 8% per annum return on invested capital before carry begins to accumulate. The waterfall typically works as follows: LPs get 100% of distributions until they’ve received back their committed capital plus the preferred return; then GPs receive a “catch-up” distribution until they’ve received 20% of total profits; thereafter, all remaining distributions split 80% LP / 20% GP. On a $300M fund that returns $900M ($600M in profit), carry equals $120M — split among the GP partnership, often 2–5 people, on a negotiated schedule.
MOIC, IRR, DPI and TVPI: the scoreboard
GPs track four metrics to assess fund performance:
- MOIC (Multiple on Invested Capital): total value returned divided by capital invested. A $300M fund returning $900M has a 3x MOIC.
- IRR (Internal Rate of Return): the time-weighted annual return, accounting for when cash flows in and out. A 3x MOIC over 10 years is roughly 12% IRR; the same 3x over 7 years is approximately 17% IRR. Time to liquidity matters enormously.
- DPI (Distributions to Paid-In): the ratio of actual cash returned to LPs vs capital called. DPI of 1.0 means LPs have gotten back exactly what they put in. Until DPI exceeds 1.0, no carry has been paid.
- TVPI (Total Value to Paid-In): DPI plus the current marked value of unrealised investments. TVPI can look great on paper for years while DPI stays low — which is why LPs scrutinise the gap between them.
Fund returners and reserve strategy
A single investment that returns the entire fund — a “fund returner” — is the GP’s primary performance driver. On a $300M fund, that means one company returning $300M+ to the fund. Because of dilution through multiple rounds, the fund needs to own 10–20% of a company that exits at $1.5B–$3B+ to hit that threshold. GPs reserve 40–50% of the fund for follow-on investments in their best-performing companies — to maintain ownership and maximise the probability of a fund-returning outcome. A company growing at 2x per year that doesn’t get a follow-on check is a portfolio management failure, not just a missed opportunity.
What this means for you
When a GP passes on your company, asks for a specific ownership threshold, or pushes for a higher valuation to reduce dilution: these aren’t arbitrary preferences. They’re rational responses to the fund’s return structure. If you understand the MOIC math your investor needs to make carry, and the DPI pressure their LPs are applying in year 7 of a 10-year fund, you can structure conversations — on timelines, on follow-on, on secondary liquidity — in terms that actually land.
Frequently Asked Questions
Q: What is MOIC and what does a 3x MOIC mean for a VC fund? A: MOIC (Multiple on Invested Capital) is the total value returned by a fund divided by capital invested — the simplest measure of absolute return. A $300M fund with a 3x MOIC returned $900M to investors. The industry benchmark for “good” is 3x MOIC over a 10-year fund life, which translates to approximately 12% IRR. Top-quartile funds target 4–5x MOIC or 20%+ IRR, achieved almost entirely through 1–2 fund-returning investments.
Q: What is DPI and why do LPs track it separately from TVPI? A: DPI (Distributions to Paid-In) measures actual cash returned to LPs as a fraction of capital called — a DPI of 1.5 means LPs have received $1.50 in cash for every $1.00 invested. TVPI includes both realized distributions and unrealized portfolio value at current marks. LPs track DPI separately because unrealized gains can evaporate — multiple fund vintages from 2019–2021 showed 3x+ TVPI on paper that collapsed to 1.2–1.5x DPI when the portfolio was eventually liquidated. No carry is paid to GPs until DPI exceeds the preferred return hurdle.
Q: How do VC GPs actually make most of their money? A: VC General Partners make the large majority of their personal wealth from carried interest — 20% of fund profits above the LP’s preferred return hurdle. On a $300M fund returning $900M in total value, the $600M in profit generates $120M in carry for the GP partnership. At a top-performing fund where 2–4 partners share carry, each partner may receive $20–60M in carry over a fund’s life — compared to $300k–$600k per year in market-rate salary from management fees.
Q: What is a “fund returner” and why does it drive VC portfolio strategy? A: A fund returner is a single portfolio investment that returns at least as much capital as the GP deployed from the entire fund. For a $300M fund, one company must return $300M+ on its own — requiring the fund to own 10–20% of a company exiting at $1.5B–$3B+. Because a fund returner is the primary driver of carry for the GP, portfolio strategy, follow-on reserves (40–50% of fund capital), and ownership maintenance across rounds are all optimized around identifying and backing potential fund returners from the initial portfolio.
Q: Why does a VC fund have a fixed 10-year lifespan and how does it affect founder timelines? A: VC funds have a contractually fixed lifespan — typically 10 years with optional 1–2 year extensions — because LP capital is committed for a specific period and must eventually be returned. This creates direct pressure on GPs to pursue exits within the fund window: a fund raised in 2018 has a hard deadline in 2028–2030. Founders in a fund raised in year 7 will experience pressure for liquidity events — secondary transactions, M&A, or IPO readiness — that their investors in newer funds do not face. The DPI pressure on a fund in year 7–9 is a primary driver of investor behavior that founders often misread as changed conviction about the company.
CTA: Use CrackTheDeck to model your outcomes in the terms GPs use internally — MOIC, IRR and fund returner math — so you speak the same language as the partner across the table.