Fund Economics: Fees, Terms, and Portfolio Monitoring

Venture fund economics are one of those topics where the broad strokes are widely known (the famous “2 and 20”) but the details matter enormously and change constantly. During my time as Head of Data Science at Aumni, I spent years working with thousands of limited partnership agreements and portfolio company datasets. That gave me a front-row seat to how fund terms are actually structured, how they’re evolving, and how investors use portfolio-level data to make better decisions. In this post, I want to pull together three threads that are deeply interconnected: management fee structures and step-downs, the broader evolution of LPA terms toward LP-friendly provisions, and the practical work of evaluating cash runway across a portfolio of companies. These topics live in different corners of the venture capital world, but they all come back to the same fundamental question: how do the economics of a fund actually work, and who benefits?

Management Fees: The Engine That Keeps the Lights On

For anyone who needs a quick refresher, management fees are the annual fees that a fund’s General Partner (GP) charges Limited Partners (LPs) to cover the costs of running the fund. These fees are typically calculated as a percentage of committed capital during the fund’s investment period, and they’re the primary source of revenue for the GP before any carried interest kicks in.

The standard in venture has long been the “2 and 20” model: a 2% annual management fee plus 20% carried interest on profits. In practice, mean and median initial management fees have been running closer to 2.4% over the last five years. That might not sound like much, but on a $200 million fund, that’s the difference between $4 million and $4.8 million per year. Over a 10-year fund life, the cumulative impact is significant. And when you layer in things like fee step-downs, fee offsets, and changes in the calculation base, the actual economics get more complex than the headline number suggests.

Management fees pay for salaries, rent, travel, legal costs, and all the other overhead of running an investment operation. Unlike carried interest, which is performance-dependent and often doesn’t materialize for years, management fees provide predictable cash flow from day one. This creates a genuine tension: GPs need fees large enough to sustain a functioning team, while LPs want to ensure the structure incentivizes performance rather than asset gathering. A GP earning generous management fees might be less motivated to take the risks necessary for outsized returns, or might be incentivized to raise a larger fund than they can effectively deploy simply to increase their fee base. Most of the negotiation around fund terms is, at its core, an attempt to balance these competing interests.

Management Fee Step-Downs: An Increasingly Standard Feature

Management fee step-downs are one of those fund terms that don’t get a lot of attention in the popular press, but they matter a lot for fund economics. The trend line is clear: step-downs are showing up more often, in more funds, with more variety in how they’re structured. By 2023, 88.5% of LPAs included some form of management fee step-down provision. If you’re raising a venture fund without one, you’re in a shrinking minority.

What Is a Step-Down?

A management fee step-down is a reduction in the management fee that occurs at a specified point in the fund’s life, typically when the investment period ends. The logic is straightforward: during the investment period, the GP is actively deploying capital, sourcing deals, and building the portfolio. After the investment period, the focus shifts to managing and exiting existing investments, which requires less operational capacity.

The step-down aligns the fee structure with this shift in activity. LPs like it because they pay less when the GP’s workload decreases. GPs accept it because it’s become a market norm and because fighting it can make fundraising harder.

Three Mechanisms for Stepping Down

There are three distinct mechanisms for implementing a management fee step-down, and the differences matter for fund economics.

Rate step-down. The fee percentage decreases, but the capital base stays the same. For example, the fee might drop from 2.5% of committed capital during the investment period to 2.0% of committed capital afterward. This is the simplest form and tends to be more common in smaller venture funds.

Base step-down. The fee percentage stays the same, but the base it’s calculated on changes, usually from committed capital to invested capital (or sometimes net invested capital, which subtracts any capital that’s been returned). Since invested capital is typically less than committed capital, the dollar amount of the fee drops even though the percentage is unchanged.

Double step-down. Both the rate and the base decrease simultaneously. This is the most LP-friendly version and results in the largest fee reduction. A fund might go from 2.5% of committed capital to 2.0% of invested capital, for instance.

From an LP’s perspective, the base step-down is often preferred. Regardless of how low a percentage rate drops, it can feel inappropriate to apply any rate to the full committed capital base later in the fund’s life when most of the capital has been deployed and some has been returned. Savvy institutional LPs tend to push for base step-downs or double step-downs during negotiations.

The GP’s Response

A meaningful step-down in fees creates real cash flow pressure for GPs, especially smaller firms that don’t have multiple overlapping funds generating fees simultaneously. Some GPs have responded by raising larger funds, stacking fund vintages closer together, or building fee revenue from other sources like advisory fees or co-investment management fees. Each comes with tradeoffs: larger funds mean larger deployment targets, which can push GPs into deals they might otherwise pass on; stacking vintages requires organizational capacity that smaller firms may lack.

For LPs, step-downs help ensure that the GP’s interests remain aligned with performance rather than fee income. A GP that earns most of its economics from carried interest rather than management fees is, at least in theory, more motivated to generate strong returns.

Emerging managers should plan for step-down provisions as a standard feature of their fund terms rather than an exception to resist. The more interesting question is how step-down structures will evolve. We’ve already seen variation in timing (some step-downs happen at the end of the investment period, others are triggered by specific events or milestones) and in magnitude. As the LP base continues to professionalize, I’d expect to see more creative and customized structures negotiated into LPAs.

The Broader Shift: LPA Terms Are Moving in LPs’ Favor

Management fee step-downs are part of a larger story. When fundraising gets harder for GPs, LPs gain leverage. As the fundraising environment tightened coming out of the pandemic-era boom, several key terms in limited partnership agreements started shifting in ways that favor LPs.

Distribution Waterfalls Are Shifting Back

The most notable shift has been in distribution waterfall structures. There are two main flavors: European (sometimes called global or whole-fund) and American (sometimes called deal-by-deal).

The European waterfall generally favors LPs. Under this structure, GPs don’t receive carried interest until all of the LPs’ capital contributions have been recovered and their preferred rate of return has been achieved. The GP has to wait until the fund as a whole has performed before they start collecting carry.

The American waterfall is more GP-friendly. Under this structure, GPs can receive carried interest from individual profitable investments before LPs have been made whole on the entire fund. A fund could have a few big wins early, pay carry to the GP, and then underperform on later deals, leaving LPs in a worse position.

During 2020 to 2022, when capital was abundant and GPs had significant leverage in fundraising, American-style waterfalls ticked up in popularity. That trend reversed as the fundraising market tightened, with European waterfalls regaining ground. This makes sense: when LPs have more options and GPs are competing harder for commitments, terms tend to move toward the LP-friendly end of the spectrum.

GP Commitment as Signal

GP commitment is another area where LPs have raised expectations. A GP committing their own capital to the fund signals alignment, and many institutional LPs now view a 1 to 2% GP commitment as baseline rather than noteworthy. This is one of those terms where the signal matters as much as the economics. A GP who has meaningful personal capital at risk is, in theory, going to be more careful and more motivated.

Governance Provisions Getting Tighter

Several governance-related provisions have moved toward LP interests.

Key person provisions have become more detailed and more commonly triggered. These provisions typically suspend the investment period if certain key individuals leave the fund or stop devoting substantially all their time to it. LPs have pushed for broader definitions of who counts as a “key person” and clearer consequences when the provision triggers.

Clawback provisions protect LPs in scenarios where a GP has received more carried interest than they’re ultimately entitled to. If early fund winners are followed by later losers, the GP must return excess carry. LPs have pushed for stronger clawback language, including requirements that GPs escrow a portion of carry distributions (commonly 20% or more) as a buffer.

No-fault divorce provisions give LPs the ability to remove a GP without cause, usually through a supermajority vote. These provisions were relatively uncommon a decade ago but are becoming more standard, particularly for institutional-quality funds. Even when they’re rarely exercised, their existence gives LPs a meaningful governance tool.

Reporting Requirements Are Rising

LPs have been pushing hard for more consistent and more detailed reporting. When every manager in a portfolio reports differently, aggregating performance data and tracking economics across funds becomes painful, especially when fund lives stretch beyond a decade.

The push for standardized reporting touches on valuation methodologies, portfolio company data, fee and expense transparency, and ESG metrics. Organizations like the ILPA have published model LPA provisions and reporting templates that many LPs use as a starting point in negotiations. The managers who get ahead of these reporting expectations tend to build stronger LP relationships – it’s a signal of operational maturity, and in a competitive fundraising environment, signals matter.

For GPs, the practical takeaway is straightforward: negotiate from a position of transparency and alignment. Terms that demonstrably protect LP interests while preserving the GP’s ability to invest effectively aren’t concessions. They’re the foundation of a durable partnership. For LPs, the current environment presents an opportunity to establish term precedents that persist across fund cycles – the provisions negotiated today will carry forward into successor funds.

Evaluating Cash Runway Across a Portfolio

All of the fund terms and fee structures above set the stage for the day-to-day work of managing a venture portfolio. And one of the most important pieces of that work is keeping tabs on cash runway across portfolio companies. Cash runway is one of those metrics that sounds simple but hides a lot of complexity underneath. At its most basic, it tells you how many months a company can keep operating before it runs out of money. But when you’re evaluating it across a portfolio of companies, each with different business models, growth trajectories, and spending patterns, the picture gets much more nuanced.

The Core Metrics

Net burn rate is the most basic building block. It measures the difference between monthly cash expenses and revenue, giving you a practical view of how quickly a company is depleting its cash reserves. If a company spends $500,000 per month and brings in $200,000 in revenue, its net burn rate is $300,000 per month. Divide the cash on hand by the net burn rate, and you get your runway in months.

The important thing about net burn rate is that it needs to be calculated honestly. Some companies have a habit of excluding certain expenses from their burn calculations, or counting revenue that hasn’t actually been collected. As an investor, you want the number that reflects actual cash movement, not an optimistic version of it.

Burn multiple adds an efficiency lens, and it’s especially useful for SaaS companies. The burn multiple measures how much cash a company is burning for each dollar of new Annual Recurring Revenue (ARR) it generates. The formula is simple: net burn divided by net new ARR.

A burn multiple below 1x is generally considered excellent, meaning the company is spending less than a dollar to generate each new dollar of recurring revenue. A burn multiple between 1x and 2x is considered good. Above 2x, and the company is burning cash faster than it’s adding revenue, which is sustainable only if the company has a long runway and a clear path to improving the ratio.

Gross margin matters too, even though it’s not a runway metric per se. A company with 80% gross margins has a very different burn profile than one with 40% gross margins, even if their top-line revenue looks similar. Higher gross margins mean more of each revenue dollar is available to cover operating expenses, which makes the burn rate more elastic as the company grows.

Market Context Matters

Cash runway doesn’t exist in a vacuum. When capital is flowing freely and fundraising rounds close quickly, a shorter runway is less concerning because the next round is probably not far away. In tighter markets, where rounds take longer to close and valuations face more scrutiny, startups are expected to stretch their capital further – a company that would have been fine with 12 months of runway in a hot market might need 18 to 24 months in a slower one. Cash runway evaluation should always be contextualized against the current fundraising environment, not just historical norms.

Warning Signs to Watch For

Several patterns consistently signal runway trouble.

Accelerating burn without proportional revenue growth. It’s normal for startups to increase spending as they scale, but the burn should be driving measurable results. If monthly expenses are climbing while revenue growth is flat or decelerating, that’s a red flag.

Over-reliance on a single funding event. Companies that have planned their burn rate around a specific timeline for their next raise are fragile. If that round gets delayed (and rounds often get delayed), the company can go from “comfortable” to “in trouble” very quickly.

Headcount growth outpacing revenue growth. People are usually the biggest expense for startups, and aggressive hiring is one of the fastest ways to compress runway. Hiring 50% more people in a year while only growing revenue 20% is a formula for rapidly shrinking runway.

Deferred payables. Some companies extend their apparent runway by stretching payables, delaying payments to vendors, or deferring other obligations. This makes the cash balance look healthier than it really is, and it tends to catch up with the company eventually.

Extending Runway When Things Get Tight

When a portfolio company’s runway gets uncomfortably short, there are several strategies investors and company leadership can pursue.

Operational expense adjustments are usually the first lever. This can range from hiring freezes and renegotiating vendor contracts to more significant restructuring. The key is to cut in areas that don’t compromise the company’s ability to hit the milestones it needs for its next financing event.

Alternative funding sources like venture debt can extend runway without the dilution of an equity round. Revenue-based financing is another option for companies with predictable revenue streams. These instruments work best when the company has a clear path to either profitability or its next equity round, and just needs more time to get there.

Revenue acceleration is the most desirable option but also the hardest to execute on a tight timeline. Some companies can accelerate revenue by shifting focus from long-term enterprise deals to shorter sales cycles, offering annual prepayment discounts, or prioritizing expansion revenue from existing customers.

Bridge rounds from existing investors are common when a company needs more time but isn’t ready for a full priced round. These typically take the form of convertible notes or SAFEs and can provide 6 to 12 months of additional runway. The dynamics around bridge rounds can be complicated, especially when it comes to terms, signaling, and what it means for the next priced round.

The Portfolio-Wide View

For venture investors, the real value of cash runway analysis comes from looking at it across the entire portfolio rather than company by company. By mapping runway across all holdings, you can identify which companies need attention soonest, prioritize follow-on capital allocation, and have more informed conversations with founders about their plans.

Thoughtful scenario modeling helps here too. By combining historical deal data with different assumptions about revenue growth, burn rates, and fundraising timelines, you can stress-test your portfolio against different market scenarios. What happens if fundraising timelines extend by six months across the board? Which companies have enough runway to handle that, and which ones don’t? This kind of analysis turns cash runway from a reactive metric into a proactive portfolio management tool. The earlier you identify a runway problem, the more options you have to address it.

One thing worth emphasizing: the quality of cash runway analysis depends entirely on the quality of the underlying data. If portfolio companies are reporting financials quarterly with a two-month lag, your runway estimates are always going to be stale. If they’re reporting monthly with standardized templates, you can spot trends early and act on them. This is one reason the push for better LP reporting provisions matters so much – better reporting requirements cascade down to better data at the portfolio company level, which feeds into better monitoring at the fund level. It’s a virtuous cycle when it works, and a frustrating one when it doesn’t.

The relationship between fund economics and portfolio monitoring shows up in other practical ways too. A fund generating healthy management fee revenue can afford to invest in the data infrastructure, analytical tools, and team capacity needed for rigorous portfolio monitoring. A fund under fee pressure might cut corners on this kind of operational investment, which ironically makes it harder to identify and address portfolio problems early. It’s a genuine challenge for emerging managers trying to build institutional-quality monitoring capabilities on tight budgets.

Further Reading

• ILPA Principles 3.0 - The foundational document on LP/GP alignment, covering fee transparency, reporting standards, and governance best practices.
• ILPA Model LPA - Industry-standard limited partnership agreement template covering management fees, carry structures, and fund terms.
• Callan PE/VC Fees and Terms Research - Comprehensive benchmarking of management fee rates, carried interest terms, and fee structure trends across fund sizes.
• Cambridge Associates Research - Data on how fee structures and fund terms have evolved over time across the venture capital industry.
• Carta VC Fund Performance (Q2 2025) - Data showing urgency around DPI generation and how fund economics translate to LP returns.

Some of the data and analysis in this post originally appeared on the Aumni blog, here, and here.