Running a fund is a lot like running a startup. You get to work with insanely ambitious teammates, solve challenging puzzles, and tell a story about how you’ll change the world.

You also get the not-so-fun responsibilities of worrying about accounting, organizing your back-office and, yes, making sure your cash never runs out.  

The basics of fund economics

If you currently manage a fund or you aspire to run a fund one day, you’ve likely heard of the “2 and 20” concept of fund economics. These numbers represent a typical compensation structure for venture capital fund managers: a 2% annual asset management fee and a 20% share of the investment profits (also known as “carry”).

But since the timeline of seeing any profits is hard to predict, the more stable and regular revenue source for fund managers is the 2% asset management fee. For example, if you manage a $10M fund, you can expect to earn approximately $200k per year in asset management fees. This is how you'll pay operational and administrative expenses, including employee salaries.

Cutting costs when you need to

As the fiscally responsible asset manager that you are, there may come a day when you decide to take proactive steps to cut unnecessary expenses and preserve your cash.

In this exercise, you can price-shop for everything, from your customer relationship management software, to your internal or founder communications—even professional services like annual tax form generation and your securities counsel. Some expenses can grow significantly while flying under the radar, and for small funds in particular, even the smallest cost-cutting can help.  

Diversifying revenue streams

On top of cost-cutting to extend your runway, you can also add new revenue streams. Remember: venture capitalists are uniquely advantaged in creating strong relationships, building community, and sharing their knowledge with others.

How does this translate to new streams of revenue?

Community and education are fundamental to an investor’s business and can be monetized in many creative ways. Can you distill your personal experience into an e-book, online course, or workshop? Leverage your network to host an in-person retreat? How about monetizing your unique skill sets into an agency-style service for marketing, go-to-market, sales, or developer solutions?

At the end of the day, your investing business can lead to several adjacent services to improve your cash position and keep the lights on.  

A word of caution

If you’re planning on diversifying your firm’s revenue, keep a couple of things in mind:

1. Avoid creating conflicts of interest. Depending on what your new service offerings are, it may be best to avoid selling to your portfolio companies or prospective founders. Investing is your primary business, and LPs trust you to manage their money without bias to your other business lines.
   
   
2. Don’t get distracted. Make a concerted effort to prioritize your core investing responsibilities and only allocate a portion of your resources to pursuing other monetization opportunities.

Treating your fund like a startup

Any time an entrepreneur starts a new business, it brings a number of challenges, including cash flow planning. Starting a new fund is no different.

Asset management fees for emerging managers are often small. But maintaining a keen eye on expenses and being open-minded to diversified revenue opportunities will allow you to stay capital-efficient, even if the next round of financing never comes.

Good luck!

Tucker McKay

(pinch-hitting for Kera while she’s on maternity leave)

This article was written by Tucker McKay. Tucker is the founder of Ikaria Labs, a content marketing agency for funds, fintechs, and financial services companies.