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The venture capital industry is experiencing a significant transformation in how funds are structured and operated, particularly for emerging managers. While traditional venture capital funds have long been the standard, requiring complex legal structures and substantial capital commitments, a new model has emerged: the Start Fund.
This article examines the key differences between traditional VC fund structures and the Start Fund model, highlighting how each serves different manager profiles and investment objectives.
Structural DifferencesTraditional venture capital funds typically operate with a complex three-entity structure that includes a Management Company (ManCo), General Partner (GP), and the Fund itself. This structure, while offering flexibility and certain tax advantages, comes with significant complexity and overhead costs. In contrast, the Start Fund model operates with a streamlined single-entity structure that dramatically reduces both complexity and costs, while offering less flexibility and service.
<table>
<thead>
<tr>
<th>Feature</th>
<th>Traditional Fund</th>
<th>Start Fund</th>
</tr>
</thead>
<tbody>
<tr>
<td>Legal Entities</td>
<td>3 (Fund, GP, ManCo)</td>
<td>1 (Fund only)</td>
</tr>
<tr>
<td>Annual Regulatory Filings</td>
<td>3</td>
<td>1</td>
</tr>
<tr>
<td>Annual Tax Filings</td>
<td>3</td>
<td>1</td>
</tr>
<tr>
<td>Bank Accounts</td>
<td>3 physical accounts</td>
<td>Virtual</td>
</tr>
<tr>
<td>Structural Complexity</td>
<td>High</td>
<td>Low</td>
</tr>
</tbody>
</table>
Cost ComparisonOne of the most significant differences between traditional funds and Start Funds lies in their cost structure. Traditional funds come with substantial upfront and ongoing expenses that can be prohibitive for new managers, especially those raising smaller funds.
<table>
<thead>
<tr>
<th>Expense Type</th>
<th>Traditional Fund</th>
<th>Start Fund</th>
</tr>
</thead>
<tbody>
<tr>
<td>Set-up Fees</td>
<td>$50,000+</td>
<td>None</td>
</tr>
<tr>
<td>Annual Expenses</td>
<td>$25,000+</td>
<td>None</td>
</tr>
<tr>
<td>Fund Expenses</td>
<td>Variable</td>
<td>None</td>
</tr>
<tr>
<td>Closing Fees</td>
<td>Variable</td>
<td>10%</td>
</tr>
<tr>
<td>Carry Share</td>
<td>1%</td>
<td>2%</td>
</tr>
</tbody>
</table>
Impact on LP ExpensesThe cost structure of a fund directly impacts the total fees paid by Limited Partners (LPs). Traditional funds have set up fees, fixed annual fees, management fees, and fund expenses, which can result in at least $500K over the course of 10 years, often much more. Assuming $500K, the percentage of LP money raised that goes to fees is as follows:
<table>
<thead>
<tr>
<th>Fund Size</th>
<th>Start Fund LP Expenses</th>
<th>Traditional Fund LP Expenses</th>
</tr>
</thead>
<tbody>
<tr>
<td>$1.5M</td>
<td>20%</td>
<td>53% of total LP fees</td>
</tr>
<tr>
<td>$3M</td>
<td>20%</td>
<td>37% of total LP fees</td>
</tr>
<tr>
<td>$5M</td>
<td>20%</td>
<td>30% of total LP fees</td>
</tr>
<tr>
<td>$10M</td>
<td>20%</td>
<td>25% of total LP fees</td>
</tr>
</tbody>
</table>
This cost analysis demonstrates why Start Funds have become increasingly popular among emerging managers, particularly those raising smaller funds or testing the waters in venture capital. The model's efficiency allows managers to focus more resources on investment activities rather than operational overhead.
• Sub-$5M Funds: Start Funds typically offer better economics due to eliminated ongoing costs
• $5M-$10M Funds: Break-even point where traditional structures begin to make financial sense
• $10M+ Funds: Traditional structures become more cost-effective, especially when considering institutional LP requirements\
Which Fund Structure Is Right For You?Choosing between a traditional fund structure and a Start Fund requires careful consideration of your current position and future aspirations in venture capital. Here's a framework to help you make an informed decision based on key factors that typically determine success with each model.
Traditional Fund (Decile Partners)• Best For: Strong fundraisers comfortable raising $10M+
• LP Profile: Medium to large LPs and institutions
• Supports: Operational flexibility and larger team
• Profile: Managers committed to venture careers
• Key Benefit: Long-term VC firm setup
• Geography: Accommodates international domiciles and European LPs
Start Fund• Best For: Managers building track record
• LP Profile: Smaller LPs, as low as $10K
• Supports: Simplified operations and limited support
• Profile: Managers testing venture capital as a career
• Key Benefit: Portable structure that can become traditional
• Geography: US domiciled
<table>
<thead>
<tr>
<th>Benefit</th>
<th>Traditional Fund</th>
<th>Start Fund</th>
</tr>
</thead>
<tbody>
<tr>
<td>Institutional Grade Operations</td>
<td>✓</td>
<td>✓</td>
</tr>
<tr>
<td>Flexibility for Complex Structures</td>
<td>✓</td>
<td>✗</td>
</tr>
<tr>
<td>Suitable for Large Institutional LPs</td>
<td>✓</td>
<td>✗</td>
</tr>
<tr>
<td>European LPs</td>
<td>✓</td>
<td>✗</td>
</tr>
<tr>
<td>No Fund Expenses</td>
<td>✗</td>
<td>✓</td>
</tr>
<tr>
<td>No Key-Individual Risk for LPs</td>
<td>✗</td>
<td>✓</td>
</tr>
<tr>
<td>Lower Minimum LP Commitment</td>
<td>✗</td>
<td>✓</td>
</tr>
<tr>
<td>Faster Setup & Closing</td>
<td>✗</td>
<td>✓</td>
</tr>
</tbody>
</table>
Making Your DecisionAsk yourself these critical questions:
Fundraising Capability• Can you confidently raise $10M+ from institutional sources?
• Do you have strong LP relationships in place?
Operational Considerations• Are you able to manage more complex fund administration?
• Do you need international investment flexibility?
Strategic Goals• Is venture capital your long-term career focus?
• Are you testing a thesis or the venture capital asset class?
Your answers to these questions should guide you toward the structure that best aligns with your current position and future goals in venture capital.
ConclusionThe choice between a traditional VC fund structure and a Start Fund model ultimately depends on the manager's experience, fundraising capabilities, and long-term objectives. Traditional funds offer greater flexibility and are designed to accommodate institutional investors with complex requirements, but come with significant costs and complexity. Start Funds provide a low-cost entry point for new managers testing the waters of venture capital, with the ability to scale into more complex structures as their track record and fundraising capabilities grow.
For managers who are certain of their long-term commitment to venture capital and who can comfortably raise larger funds with institutional backing, the traditional structure remains appropriate despite the higher costs. For those seeking to build a track record, accept smaller LP commitments, or test venture investing as a career, the Start Fund offers a pragmatic alternative that minimizes both risk and expense.
