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🤔Should Syndicate Leads Take Management Fees?

I am very excited to finally write on this topic given the diverse thinking on SPV management fees. This is actually the first topic we've written about where Zach and I (Alex) strongly disagree. 

Before we get into here, let’s first explain how traditional venture capital management fees work.

Venture capital management fees are charges for the ongoing operation of the fund, typically calculated as a percentage of the committed capital in the fund. These fees are commonly set between 1% to 2.5% per year for 10 years (and tend to be frontloaded), and are used to compensate the fund managers for their services and to cover the expenses of the fund. Almost all funds (if not all) charge management fees and it’s generally accepted without any pushback.

Management fees in Special Purpose Vehicles (SPVs) are similarly charges for the ongoing operation of the fund. These fees are typically expressed as a percentage of the SPV's total capital raised and can be collected annually or as a one-time, up-front fee. Similarly, these fees are for operating the fund. In the SPV ecosystem, management fees are far less common however with many syndicators often receiving significant pushback from LPs on management fees. However, for established large funds who run sidecar SPVs, management fees on SPVs are more accepted and standard. 

Management fees have been a hot topic over the years across many syndicate leads (and LPs) without any consensus. 

As mentioned, all traditional venture capital funds take management fees as it is important for them to use these fees to make key hires, manage legal expenses, and provide portfolio company support, among other initiatives. The role of a syndicate lead is similar but syndicate GPs often have much lower overhead and may have no other key team members, and minimal ongoing legal/other expenses. Some syndicate leads do charge management fees but many full time syndicators do not.

In this post, we are going to explore:

• A break down of management fees & how are they used by VCs

• Why some syndicate leads charge management fees while others do not

• My personal Hot Take on me as a SPV Lead taking management fees and why Zach disagrees

• Syndicate leads thoughts and feedback on management fees

Let’s get into it. 

Management Fees & their role in Venture Capital

In venture capital, management fees are annual payments made by the fund's limited partners to the general partner (GP) for managing the fund and its investments. These fees compensate the GP (and employees) for their time, effort, and expertise in sourcing, evaluating, and supporting portfolio companies. They essentially cover the operational costs of running the fund.

How are management fees calculated and used?

Percentage of committed capital: Typically, management fees are expressed as a percentage of the committed capital raised by the fund. This percentage usually ranges from 1% to 2.5% but is most commonly at 2% fees per year. 

Example: a $100 million fund charging a 2% management fee would receive $2 million annually.

Allocation to LPs: Management fees are ultimately paid by the limited partners (LPs) who invest in the fund. They are deducted proportionally from the fund's net asset value (NAV) before distributing profits to LPs.

Covering fund expenses: Management fees are used to cover various expenses associated with running the fund, including salaries for the team, legal and accounting fees, travel costs, and office overhead.

Supplementing carried interest: While carried interest represents a share of the fund's profits upon liquidity events of portfolio companies, management fees provide the GP with a more consistent source of income throughout the fund's lifetime, regardless of performance.

Management fees are a crucial part of a Venture Capital fund, and are universally expected

These fees are used to attract and retain talent. The fees ensure the fund has sufficient resources to operate, source, diligence and support portfolio companies. The fees support ongoing legal expenses for fund administration and other. Also the alignment/structure allows for GPs to manage the fund but also be incentivized to return more capital to LPs which in turn is a larger pool of carry for themselves.

Moving from SPVs to Funds for a Salary

I think many syndicate leads end up going from syndicating deals to starting a fund partially because of the need for management fees (e.g. certainty of income, which syndicate GPs otherwise do not have). There are tons of reasons SPV leads would raise a traditional (or rolling) fund, but one of them is to receive a salary, which structurally SPVs do not provide, or at least it is way less common and consistent.

I was recently submitting a deal to a fund admin platform to run an SPV and in the intake form I saw this (so we are not unique in this thinking).

A potential way to generate salary-type income and support operating SPVs full-time (and yes it is a full time job to do it at any meaningful scale) is to charge management fees on SPVs deal-by-deal. 

Most traditional venture funds today charge management fees to their LPs on sidecar SPVs as candidly their LPs are already used to this given they pay management fees into the fund.

Menlo Ventures is reported to be in the process of putting together a $500M SPV into Anthropic. While we can’t verify, credible reports around the ecosystem suggest that they are charging management fees (in addition to carry) on this SPV. Hypothetically, if they charged a 1% management fee/year, that would be $5m/year in management fees or $50m on this SPV alone over a 10 year period. years. You can read more on this from our friend Chris Harvey here.

Despite acceptance of these sidecar SPVs for established funds like Menlo Ventures, syndicate leads very often receive pushback on charging any fees at all. This is especially true for syndicators who began their syndicate careers charging 0 & 20 (i.e. 0%/no management fee and 20% carried interest). In this scenario, LPs have become accustomed to no management fees and often won’t invest if it's changed. For example, I’ve been running SPV’s for the past 5 years, probably 98% at 0 & 20. If I want to go out tomorrow with a SPV with a 2% management fee, I think my LPs would react negatively. There is nothing stopping me, but others around the ecosystem have tried with extremely negative pushback e.g. they weren't able to close SPVs.

The Challenge

For the many full time syndicators, there is no built in solution to making money upfront without management fees, meaning many of the syndicators who are spending 40-80+ hours per week sourcing, diligencing, marketing, closing and supporting SPVS, LPs and founders are receiving nothing upfront and potentially nothing at all ever for their effort. When you are only capitalizing on carry that is not going to support any quality of life, at the moment, as there is no income source to pay bills. This is why many syndicate leads syndicate part-time (e.g. they have full time jobs) OR are full time with the goal to raise a fund to begin collecting a salary. It’s also why there’s so much turnover in this ecosystem - it is an incredible amount of work with minimal income for many. 

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A Reminder on how (most) Syndicate Leads invest

So here is my (personal) opinion…

For the deals I syndicate, we are typically smaller investors in the company. We do not take positions as the lead of the round, we don’t take board seats or anything else beyond a smaller investor in what we feel is a high-quality company and likely a competitive round. Sometimes, we hit a threshold to access “major investor rights”, which has its advantages, however it doesn’t change how we operate/interact with the founder(s) post-investment. 

🔥 My Hot Take 🔥

Given this approach, I do not think that my style of investing justifies taking management fees like a traditional fund would. Yes, we manage the investment going forward like a fund, however the involvement is not as hands-on as an institutional fund or a lead investor. 

We do high-volume deals as a syndicate lead and therefore, there is no way I can be hands on with 300+ portfolio companies to the extent that, in my opinion, justifies taking management fees. Trust me, I would have loved to be able to do this early on or now, but I do not think LPs should be paying me management fees as a syndicate lead in the higher-volume style we invest.

**My Last Money In Co-Author/Partner, Zach Disagrees**

“Of note, my Last Money In parter Zach highly disagrees with me here - his argument is management fees would support better practice across the SPV ecosystem and GPs would have the ability to source better companies, better support their LPs, feel more of an obligation to support SPV LPs over the course of the vehicles life cycle (in other words provide more regular communication, not ghost LPs once an SPV closes, etc., which unfortunately is all too common), among other factors. 

He thinks the ecosystem lacks best practices and has such high GP turnover partially because full time SPV GPs are doing an enormous amount of work (equivalent to a full time job and then some) with Syndicators receiving no income from their effort for years and with no guarantee of any income at all from their effort ever. There’s a massive disconnect in this ecosystem between GPs and LPs - everyone is frustrated (I hear CONSTANT frustrations and anger from both LPs and GPs Leads…) and a steady income (i.e. management fees) could solve a lot of these issues. 

To be clear I’m not giving Syndicate GPs an out for poor practices (that is wrong and there’s no excuses), but there’s no question that full time syndicators should be receiving guaranteed income their effort as any fund manager would - the “good” full time syndicators are doing everything (admin, sourcing, diligence, marketing, LP support, portfolio support, additional legal that fund admins can’t provide, hiring, etc.) and doing so without any income…in what other job with this level of obligation and responsibility would this ever happen?”

So what justifies charging management fees?

Not every syndicate lead operates the way I do. Some venture firms have major hires they need to make, ongoing legal expenses, portfolio support teams, etc. that we do not have (nor can we afford to have). For traditional venture firms with these needs, I do think management fees via SPVs are justified. In my opinion, in this scenario, the syndicate lead is operating just like a venture fund that charges management fees and manages the investment in a meaningful way.

Alternatively the default of no management fees in SPVs for syndicators has made it more difficult for many to charge management fees given the expectation baseline. If you are an LP, would you rather invest via GPs that charge no management fees or that charge 20%?... In reality, the deal quality is what should matter, but even the sight of management fees will turn LPs off to evaluating further.  

What do other Syndicate leads have to say about Management Fees?

Anyways, all of the above is just my personal take (and as noted Zach feels very different). Given the wide ranging differences in opinions, we wanted to get the perspective from other syndicate leads to include. Below we are including many of our syndicate lead friends/counterparts to get their take on management fees.

Spoiler Alert → these Syndicate leads have many different takes on management fees 🙂 

We asked these syndicate leads the following questions:

1. Do you think syndicate leads should take management fees (Y/N)?

2. Why or why not?

3. If there is anything else important on the topic you feel is important to include?

Ben Zises, founder of SuperAngel.Fund and Super Angel Syndicate, which invests in early stage Consumer (CPG, eCommerce SaaS), PropTech, & Future of Work companies. 

1. Yes

2. After completing more than 25 SPVs, it is clear to me the amount of work that is involved. First, to secure allocations in often highly competitive rounds (which can be years in the making), then to work with the founders to collect, compile and present the information, prepare, launch, provide IR support, and ongoing updates to investors. With 350+ investors across SuperAngel SPVs, it has proven to be a substantial time commitment and one that takes me away from other fee opportunities. As we grow, the management fee is extremely helpful in covering the costs involved in leading a top-tier angel fund and syndicate. 

3. Pretty confident more GPs and Syndicate Leads will charge a management fee on SPVs. There is a REAL cost of doing the work and delivering quality information and investment opportunities. That, plus the ongoing work over a 10-year period is more than enough to justify a small management fee. If a SPV investment is successful, the management fee will almost always not have a material impact on the LPs returns.

Jed Ng, Syndicate Lead

1. Yes.

2. Running a syndicate at a high level takes an incredible amount of time and effort. Unlike fund GPs, syndicate leads do not draw a salary so a management fee partially helps with compensation in order to keep this sustainable. In my view, syndicates can charge a 2% one time management fee. As the avg. check scales to $200k+ that fee can go up to 3 - 3.5% one-time such that the all in costs for LPs is capped at 5 - 7%.

Jamie Melzer, Managing Director @ HF Scale Partners and GP of a secondary opportunity fund

1. No. Well, Maybe.

2. Generally, no. 2 and 20 for an SPV is a hard no for most investors, and frankly, the work to manage an SPV doesn't warrant 10 years of management fees. At the same time, a lot of GPs and syndicate leads are doing a lot of upfront work to source, diligence, and secure allocations in deals to bring to their LPs (some more than others...) and are often doing it for free (or for the long-term carry upside). I think a small upfront (one-time) management fee can make sense. We have also tested out structures where we reduce carry in exchange for an upfront management fee (eg a 5% management fee either upfront, or 1% over 5 years and 10% carry) and that has been well received by investors, particularly in later-stage investments. 

Morgan Schwanke, Founder & General Partner at Mana Ventures

For the vast majority of our deals (99%) we do not take management fees. This is because we know lp's are fee sensitive and with AngelList already taking a variable percent on each deal for the management of the SPV, services, and taxes, it does not make sense for us to tack on additional fee as it would negatively impact our ability to raise effectively while also detering value add lp's from participating. 

However, I think there are a few situations that warrant taking a management fee. The first, is if you are not using a platform like AngelList and managing the actual SPV entity and doing the tax returns / K-1's yourself annually, there is a cost for doing so and it is reasonable to distribute that cost to the lp's as a one-time management fee (typically we've done this as 10% raised). The second, on some late stage / pre-IPO deals we will take management fee; my reasoning for doing so in these scenarios is the following. On most early stage deals the 20% upside carry is attractive enough to motivate you to do the deal, as the upside scenario could be carry on a 10x, 25x, or 50+x outcome. On late stage / pre-IPO, given valuations are oftentimes in the "unicorn" stage, the outcomes may only be 2-4x+ outcome, and so also adding on some management fee to supplement is helpful. The syndicate game is almost all on the carry, as it should be.

Joe Tonnos, Syndicate Lead at Ketch Ventures

1. MAYBE - I am mixed on this depending on the deal

2. I believe that syndicate leads take a lot of risk and value of their most precious asset, time. I believe management fees are warranted, but not on an annual basis. Many syndicate leads who raise larger syndicates directly from HNWI or FO will take a one-time due diligence fee and then collect annual fees to cover expenses. I've used this model in a couple of scenarios and it works. What I believe is fair is a one-time 3-5% management/due diligence fee along with either (i) one-time management fee to cover annual syndicate expenses, or (ii) pro-rata expenses each year. 

What has worked for me in the past is:

• 3% due diligence fee (paid up front)

• 5% one-time expense fee (for life of the SPV; optionality to call additional capital if necessary for expenses only)

This allows for syndicate leads to get something for their effort beyond carry, but is much more affordable vis-a-vis the traditional model of 2%/year for the life of a fund or over the investment period.

3. I believe that management fees and/or due diligence fees are warranted for higher-quality investments or those that are harder to get an allocation. I don't believe every "random" deal a syndicate lead has on AngelList (for example) warrants a management fee.

Cindy Bi, General Partner at CapitalX

If the deal is considered hot, for late stage, GPs may feel justified to charge management fees because they can. It's really about if they can get LPs even when charging fees, not about extra effort needed from the GP side, unless I'm missing something.

(But would like to add the caveat that management fee is needed if it's secondary due to the ongoing annual fee required by SEC.)

Faiz Mayalakkara, GP of Kube VC

1. Yes

2. Managing investments takes a lot of time and effort. To ensure that GP is “motivated and committed to the deal” it is important to have management fees.

Matt Wilson, Founder and Managing Director of allied.vc, Western Canada's largest angel syndicate. Also an LP in numerous syndicates and VC funds.

1. The good leads, yes.

2. In a perfect world, a small management fee would be appreciated. Personally, I work to source deals, perform diligence, win allocations, and write each of our deal memos. I also pay all overhead expenses out of pocket, including travel, conferences, office expenses, website, and other operational costs. Lastly, I commit 2-5% on every deal from my personal account. It's undoubtedly a significant commitment. As a result, LPs get to cherry-pick fully vetted investments managed for 10 years. It's a fantastic deal for LPs, but unfortunately, many syndicate leads eventually move on to traditional fund structures as the operational costs of running a syndicate add up. As an LP myself, I value the opportunities sourced by top syndicates and want to continue seeing great dealflow, so I'd happily pay a small management fee to keep them incentivized.

3. In line with your recent post on Syndicate Worst Practices and Concerns, we saw a lot of pump-and-dump syndicate leads enter the market in 2020-21. As the tide rolled out, their reckless behavior left a bad taste in the mouths of many LPs who now struggle to receive any communications or portfolio updates. There's a very serious responsibility to be a good steward of capital when running a syndicate, so any leads that have stuck around and continue to source attractive deals are worthy of a small management fee, in my opinion.

David Yakobovitch, Syndicate Lead and Emerging Fund Manager for DataPower Ventures. I am also a Venture Partner / Advisor for Legendary Ventures.

1. It depends. 

2. I think this depends on a case-by-case basis, because classically Fund Managers charge management fees. Traditionally, it seems that management fees are less common for syndicate SPVs. With that said, I see the logic on why syndicate leads should take management fees, especially for those who are running their syndicate full-time. Most syndicate leads are Operator VCs, often having a full-time job, in addition to creating syndicate vehicles. My quick take is that syndicate leads who are working full-time on their SPVs and / or as an Emerging Fund Manager should take management fees when possible, though these fees will often be flexible and adjusted for each vehicle. Syndicate leads who work full-time at BigTech companies or late-stage startups should consider any conflict of interest for by earning a salary employed and taking management fees. When I got started as a syndicate lead, I was working full-time for tech startups too, so I did not take a management fee. Now that I have moved full-time into VC, I am more likely to assess management fees on selective SPVs where it's appropriate, as I would be managing this relationship and its growth over the lifetime of the company.

Anonymous

"I don't think mgmt fees make a ton of sense for many of the small allocations that are on AngelList, but make more sense as you flex up to large vehicles <$5M for later stage companies where SPVs act as a side vehicle for a primary fund investment where LPs would be paying a management fee anyway. Coordinating and managing large SPVs also require significantly more ongoing work given the material ownership of the company."

—-

As a reader, LP, VC, SPV Lead, what do you think?

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✍️ Written by Zachary and Alex