Understanding and measuring venture capital terms — a landmark report

A discussion on our state of terms report, its relevance for fund investors and fund managers, and selective statistics and analysis. 

One of our core objectives at Different is to make venture capital more transparent and accessible.  While public equities may align with the efficient markets hypothesis and operate on the rapid and open sharing of information, private market investments are frequently opaque. Venture capital is no stranger to this opacity, historically.

In the venture capital industry, both fund managers (GPs) and fund investors (LPs) frequently ask the same questions: What are other funds doing as a portfolio strategy? What’s a typical minimum LP investment? How common are hurdle rates? How do different funds approach their management fees and expenses?

And while the 2 and 20 fee model is broadly assumed in private equity media coverage, very little is published about the actual terms that funds choose.

That’s why we created our State of Terms 2018 Venture Capital Benchmark. In this report, we unpack a variety of statistics and trends around these common questions. Given our relationship with venture funds and the fundraising process, we’re able to acquire and vet data first-hand from the funds’ operational and marketing documents. Through our due diligence process, we’ve compiled a dataset of terms for a variety of venture capital funds in cities across the US. The analyzed funds were all fundraising at some part during 2018, and offer color on the market for this moment in time.

So how can this report help you?

For fund investors, use the report to monitor how venture capital terms evolve. Compare specific funds to industry averages. You might assess a fund’s 10-year average management fee against the market (2.04% average per year for 2018 funds), or dig into hurdle rates vis-a-vis other funds (33% of funds had a hurdle rate in 2018) and other asset classes. If you already have an allocation to venture, you may compare your current fund roster to the rising vintage of funds. “While there are many surveys on investor sentiments and manager outlooks, there’s been limited insights into specific venture capital terms until now,” shared a director for a family office.

For fund managers, use the report to understand how your VC fund compares to the market. If you’re setting terms for your next fund, the benchmark can help you improve your own fund’s strategy and structure through historical data and GP commentary. Perhaps you’re debating whether to create a Private Placement Memorandum as part of your documents (55.7% of funds created a PPM in 2018). You might be debating where to cap formation expenses or whether to cap them at all (60% of funds had a cap). Or perhaps you’re just wondering if your LP Agreement is too long (industry average was 29,942 words).

With the report, you can know ‘what’s market’ and what isn’t while gathering context on why some funds choose certain approaches. “The State of Terms helped answer so many of my questions. Finally, someone has released the benchmark we’ve been looking for”, expressed one venture capitalist.

For those new to venture capital, the report offers additional context and discussion around all these terms to help you understand the asset class. Use it to help answer questions and surface other questions worth asking.

The benchmark explores trends in:

  • Management Fees
  • Performance Fees / Carried Interest
  • Fund Expenses
  • GP Commitments
  • LP Commitments
  • Hurdle Rates
  • Clawbacks, Key Person Clauses, etc
  • Portfolio Construction and Follow-on Capital
  • Management and Document Structuring

Download the report here.