How Venture Capital Funds Make Money

Venture capital is not a charity. It is a business built on a simple but brutal math: most startups fail, a few return capital, and one must return the entire fund. The way VC funds make money reflects that reality—fees to survive, carried interest to thrive, and exits to deliver.

The Two Pillars: Fees and Carry

A venture capital fund earns money in two ways. The first keeps the lights on. The second makes the partners wealthy.

Management Fees: The Steady Income

Management fees are an annual charge on the fund’s committed capital. They typically range from 1.5% to 2.5% . For a $50 million fund charging 2%, that is **$1 million per year** to cover salaries, office rent, due diligence, legal fees, and travel.

The fee is not profit. It is survival money. It allows the fund to operate during the long years before any investment matures. Most VC funds have a 10-year lifespan, with fees charged on committed capital during the investment period and on invested capital thereafter .

Carried Interest: The Big Payday

Carried interest—or “carry”—is the fund manager’s share of the profits. It is typically 20% of the profits above a hurdle rate (usually around 8%) .

The math works like this: If a VC fund turns $50 million into $150 million, the profit is $100 million. The investors (Limited Partners) get their $50 million back first, plus the hurdle return. The remaining profit is split. The VC firm takes 20% as carried interest. The LPs get 80% .

This structure aligns interests. The VC firm only gets wealthy if the fund performs. A poorly performing fund generates management fees but no carry. A top-performing fund generates both.

The Power Law: Why One Deal Matters More Than the Rest

Venture capital follows a power law, not a normal distribution. What matters most is owning a piece of the outlier that has a chance to “moonshot” .

In a typical portfolio of 20 to 30 companies:

• Most will fail entirely, returning nothing

• Some will return capital or generate modest returns

• One or two will deliver exceptional returns that cover all losses and generate the fund’s profit

This is why VCs target 10x or greater returns on individual investments. A fund that returns 2x overall is considered successful. A fund that returns 3x is excellent. A fund that returns 10x is legendary.

The power law shapes every decision. VCs are not looking for businesses that will grow steadily. They are looking for businesses that can scale to a venture-scale outcome—typically a $1 billion valuation or more.

Exits: Where the Money Is Actually Made

Management fees keep the firm alive. Carried interest is earned through exits—selling the fund’s stake in a portfolio company for more than it paid.

Trade Sales: The Dominant Route

The most common exit is a trade sale to a strategic buyer—a larger corporation in the same industry or an adjacent one. In 2025, trade sales accounted for 38% of African private capital exits .

A notable example: Five35 Ventures exited its investment in Ghanaian agritech company Complete Farmer in 2026, generating a 3.5x return—a 38% internal rate of return over four years. Complete Farmer’s valuation rose from $6 million to $49 million during the holding period .

Secondary Sales: Selling to Another Investor

A secondary sale is when the fund sells its stake to another VC or private equity firm. In 2025, secondaries accounted for 26% of African exits, their highest share on record .

Initial Public Offerings: The Dream That Rarely Happens

An IPO is when a portfolio company lists on a stock exchange. It is the dream exit because it can generate the highest returns and provides a liquid market for the fund’s stake. But IPOs are rare in Ghana. Across Africa, IPOs accounted for only 5% of exits in 2025, with just four recorded on the continent .

Buybacks: The Fallback

Sometimes, founders or management buy back the VC firm’s shares. Private sales (including management buyouts) accounted for 19% of African exits in 2025 .

Write-Offs: When Things Go Wrong

Not every exit succeeds. In 2025, 6.2% of African private capital exits resulted in full write-offs—where the fund recovers nothing. This is broadly in line with global benchmarks of 3–8% .

The Distribution Waterfall: How Money Reaches Investors

When a fund exits an investment, the proceeds do not immediately flow to the VC firm. They pass through a distribution waterfall—a structured process that determines who gets paid, and in what order .

Stage 1: Return of Capital. Investors receive distributions until they have received back 100% of their original capital contribution.

Stage 2: Preferred Return. Investors then receive a hurdle rate—typically around 8%—on their capital before the VC firm shares in profits.

Stage 3: Carried Interest. Once investors have received their capital and the preferred return, the VC firm takes carried interest, typically 20% of the excess profits.

This structure ensures that the VC firm only gets paid after investors have been made whole.

The Fund Lifecycle

A VC fund typically has a lifespan of 7 to 10 years :

Years 1–4: Fundraising and deploying capital. The fund raises money from LPs, identifies startups, conducts due diligence, and invests.

Years 4–7: Supporting portfolio companies. The fund works with founders to grow the businesses, often taking board seats and providing strategic guidance.

Years 7–10: Exiting and returning capital. The fund sells its stakes and distributes proceeds to investors. This is when carried interest is calculated and paid.

The average holding period for African PE/VC investments is now 6.4 years, with quick exits (under five years) dropping from 33% in the early 2000s to just 12% in recent years .

The Ghanaian Context

Ghana’s VC ecosystem is growing but faces structural challenges. Over 95% of VC/PE funding available to Ghanaian SMEs is in foreign currency, creating exchange-rate risk for businesses earning in cedis . Local institutional capital remains largely untapped, with pension funds allocating barely 1% of assets to private equity and venture capital despite a regulatory cap of 25% .

The GVCA’s 5% Pension and Insurance Industry Compact, launched in April 2025, aims to raise that allocation to 5% by 2026, potentially unlocking more than $1 billion for domestic businesses .

The Ci-Gaba Fund of Funds, Ghana’s first private fund of funds, reached a $70 million first close with more than two-thirds anchored by Ghanaian pension funds. It is structured in local currency and includes a 30% first-loss layer from catalytic capital to de-risk pension investment .

For VC funds operating in Ghana, the challenge is not just finding exits—it is finding exits in a market where IPOs are rare and the pool of strategic buyers is limited. Trade sales to pan-African or international buyers are the most viable route .

Quick Facts

Frequently Asked Questions

1. How do venture capital funds make money?
VC funds earn through management fees (1.5%–2.5% of committed capital annually) and carried interest (typically 20% of profits above a hurdle rate). The real wealth comes from exits—selling portfolio companies for a multiple of the purchase price .

2. What is carried interest?
Carried interest is the VC firm’s share of profits, typically 20%, paid only after investors receive their capital back plus a minimum return (hurdle rate, usually 8%) .

3. What is the power law in venture capital?
The power law means most startups in a portfolio will fail, a few will return capital, and one or two will deliver exceptional returns that cover all losses. VCs target 10x or greater returns on individual investments .

4. What is the most common exit route for VC funds in Ghana?
Trade sales to strategic buyers are the most viable exit route, accounting for 38% of African private capital exits in 2025. Secondary buyouts and IPOs are less common .

5. What is a distribution waterfall?
It is the structured process for returning capital to investors. Stage 1 returns original capital. Stage 2 pays a preferred return (hurdle rate). Stage 3 pays carried interest to the VC firm .

6. How long does a VC fund last?
A VC fund typically has a lifespan of 7 to 10 years: 3–4 years for deployment, 3–4 years for growth, and 3–4 years for exits .

7. What happens if a VC fund cannot exit an investment?
If a fund cannot find a buyer, it may extend the holding period, transfer the asset to a continuation vehicle, or ultimately write it off. In 2025, 6.2% of African PE exits resulted in full write-offs .

8. How much do Ghanaian pension funds allocate to VC?
Pension funds allocate barely 1% of assets to private equity and venture capital, despite a regulatory cap of 25%. The GVCA 5% Compact aims to raise this to 5% by 2026

Source: Accra Street Journal

Last Updated on October 12, 2026 by Samuel Kwame Boadu

Samuel Kwame Boadu

Samuel Kwame Boadu is a Ghanaian media entrepreneur and storyteller with a passion for amplifying urban voices and uncovering everyday truths. He is the Editor-in-Chief and Founder of Accra Street Journal, a dynamic digital platform dedicated to capturing the pulse of Ghana’s capital—its people, culture, challenges, business, sports and innovations.

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