Fund Financials 101 with Manuel Silva Martínez (Mouro Capital)

Included VC
Included VC
Published in
11 min readApr 14, 2021


These fellow insights have been compiled and written by Included VC Fellow Georgina Nwabueze.

Manuel Silva Martínez, General Partner at Mouro Capital, breaks down the world of fund financials for Included VC.

Being on a programme of 50 VC hopefuls looking to break into the industry, the biggest goal for many of us is to either become a partner at a fund or raise our own fund. So you can imagine our excitement when we got the chance to learn the intricate details behind the financials of a fund from a highly experienced General Partner, Manuel Silva of Mouro Capital.

The biggest takeaway from Manuel was that the reality of fund financials is not as glamorous as reported in the press.

Those big numbers you hear about come with some serious small print that you need to understand if you want to manage a fund successfully.

In this article, we are going to break down the small print and you will learn:

  • The key players in a VC Fund
  • Why VC’s don’t make money first
  • The 2/20 Rule behind every Fund
  • Fund Expenses 101
  • Understanding Your Gains
  • The Bad News you need to consider if you are going to manage a fund

So let’s start with the basics:

The Key Players in a Fund

In every VC Fund, there are two key players, Limited Partners (LPs) and General Partner (GPs). Limited Partners are the people who put the money into a fund and they invest for a return. Typically, they are passive in the way they manage their funds. So usually GPs would set some guidelines as to how LPs would invest with them, in their thesis. If the LPs like the thesis then they will invest. The mission of any fund is to generate a return for the LPs.

General Partners manage the fund. Their main investment in the fund is by doing the work required to generate a return. They use their expertise, connections and access to source deals. GPs intangible input in the fund is their ability to think about investments, thinking about trends. So it’s kind of that thought process they bring to the table, they manage everything from, sourcing investments to executing, to managing a portfolio, to deciding whether they want to keep on investing in a startup.

So usually you would set some guidelines as to how you invest with them. So the general partner would say, “well, you know, this is my thesis, this is the theme I’m interested in.” And then the guys would say, “yeah, we like the theme of the money with you guys.”

Why VC’s don’t make money first

The basic rule with funds is that VCs don’t make money first. The LPs put in the money so they always get paid first and GPs get paid last. So a major reality check here is that the big pot of money you raise has to be paid back. Only after this can any returns you make be shared amongst the key players.

However, the LPs will always get the lion’s share of that as most funds follow the 2/20 rule.

The 2/20 rule:

Generally, funds are structured around the 2/20 rule. This allows GPs to deduct a 2% management fee from the initial funds raised for every year of the fund’s life used to pay general, day to day expenses. After the fund has paid back the LPs any gains leftover will be shared between the two main players. The bulk of the returns go to the LPs who get 80% of the gains. Whilst GP’s get a 20% share of those returns, this is called their carry or carried interest.

A GP’s carry is the share of the capital gains that they get as compensation for achieving good returns with their portfolio. So the 2/20 rule basically dictates how fund managers make money.

It’s hard to live on 2%

Unlike the legendary perks and treats, you hear about in the startup world. VCs don’t get those fun perks. At Mouro Capital you make your own coffee, there is no first-class travel and offices are kept basic.

“Mouro Capital has $400 million under capital which seems like a lot, but actually, it’s not that much. We don’t travel in luxury, we run a very tight ship, our offices are spartan, we make our own coffee and we don’t expense anything. The truth is that it’s increasingly hard to live on 2%”.

Although the 2/20 rule is the way most funds are structured not everybody gets 2%. Typically funds get less and it is quite rare to get more. So you are always working with limited resources when it comes to managing your day-to-day expenses and you also have to keep in mind the funds you raise have to last for the life of the fund which is typically 10 years. So that 2% will have to be stretched a long way.

Fund Expenses

I’m guessing you are wondering what that 2% gets spent on. According to Manuel managing a fund is expensive and to do so successfully you need to manage your funds to ensure you remain profitable for the long term until you exit.

The 2% management fee covers all the fund’s operational cost and day-to-day expenses. There are a lot of expenses you need to pay out of your 2% and for that reason funds are kept as very light structures.

Some essential fund expenses are:

  • General costs

Lawyers fees, due diligence advisors, travel expenses, etc.

  • Regulators and licensing costs

For some funds, you are required to deposit money with your regulators. These expenses can add up quickly and they are not always for items that you actually need to move the needle on your fund’s core thesis. It can often feel like money out the door but they are important expenses that you have to consider in the management of a fund.

  • People costs

This is the biggest cost in any fund as 70% or more of a fund’s operating expenses goes on salaries and compensating people. So most of the money you raise is invested in people,

  • Value-Add for Startups

Many funds such as Andreesen Horowitz, have community building services and business development teams to act as a value-add for their startups. This is usually part of their value proposition. But this is still an expense that has to come out of the 2%.

Reducing Expenses

With high operational costs funds have to be creative about reducing costs and some options in doing so are:

  • Carry vs Salaries

Instead of salaries some funds to offer more carry interest to people instead of paying them a salary. This is usually the case for venture partners who are more on the operational side or may take board seats. Instead of a salary they are rewarded by carry points so they benefit from the upside. That’s the most common way to reduce expenses.

  • Outsourcing

Some funds reduce costs by outsourcing activities like research to part-time people or students. Although this isn’t always the best practice as it doesn’t really save much in the end.

  • Don’t use up all your 2%

According to Manuel 2% is the maximum budget, but a lot of funds don’t use up all their budget as a way to reduce expenses because at the end of the day if you use more fees, that means that you have fewer assets to invest.

Understanding Your Gains

When a GP successfully exits a fund they typically get a 20% share of the gains after they have successfully returned the initial fund to the LPs, this is called the carry interest. However, before you can access your carry there are a couple of factors you need to understand.

  • Not everyone gets 20%, some funds get more or less. Very successful funds can negotiate more.
  • The 2% management fee that you deduct every year is only a loan and it will need to be paid back before you can even get your carry.
  • Some funds have hurdles that you need to get over before you can access carry. The hurdle rate is defined as the minimum threshold (“preferred return”) that LPs must receive before a GP can receive its carried interest ( “carry”).
  • Carry is vested over years, it is not something that you get the day you arrive in the office. It’s something that vests over time, usually 7–9 years. So, you need to be able to commit to a project for a number of years.
  • As a GP you may need to personally commit to the fund. A commitment is a requirement which may be placed on GPs to commit their personal money in the fund if they wish to access the carry interest. If it is required there are ways to finance it either through debt options or salary sacrifice arrangements. Although first-time fund managers can argue it should be a minimal amount or not required. This is common practice in the USA and usually with second-time funds and older.

Carry Napkin Calculation (*figures are for illustration purposes only)

Now let’s say you are managing and thinking about the exit. You will want to know how much carry you can access after all that work. In order to calculate the carry you need to determine

  1. What is the minimum return you will need to achieve on your fund for you to access your Carry?
  2. If there is a hurdle threshold, how will it affect your return?

To get the answers you need to do some basic calculations:

1. First estimate your 2% fees:

During the years when you’re investing, you will maintain a flat fee to cover increased expenses for investments. Then after investments are done the fee this is usually reduced by 10% each year.

Especially as at year 5, you will start raising another fund and the management fee for that fund will overlap with the management fee for this fund which means you will have a bigger budget.

The important thing here is that as you can see your fees add up to around 17.4% by the end of the fund. So after your fees have been deducted you have 82% left as an investable amount.

This means that in order to return your fund and your management fees, you would need to generate a minimum return of 1.2x the fund. So if you have a $100 million fund you need to return a minimum of $120 million.

2. Estimate your hurdle (minimum rate of return):

After paying back your management fees, the next barrier you face before you get access to carry is the hurdle.

The preferred return is usually expressed as a percentage return per year. Typically this can range from between 6% — 12% per year.

In our example, the hurdle means that the LPs must receive a 6% annual return on their contributed capital before the GP can receive carry. This means you need a minimum 1.8x return to access your carry. On your $100 million fund that is $180 million nearly double the fund before you can access your carry.

3. Calculate the road to carry:

So you have considered the hurdles and management fee but you still have to do a few more calculation before you can access your carry.

In our example, you would need to estimate the likely returns that the companies you have invested will be able to generate:

  • The biggest indicator of what your portfolio companies can generate will be based on their survival rate. This is the rate of survival of your portfolio companies across the life of the fund.
  • If you are investing at pre-seed you can see that we are estimating that only 15% of your companies will survive. If that is the case then you will need a 12x return on your winners to be able to pay back your fund.
  • This means that if you’re investing in a company and you don’t believe that company can do 12x then you are setting yourself up for future failure.
  • Your internal rate of return in basic terms is the rate at which your investments break even across the lifetime of the fund.
  • In our example, we would need a 36% IRR to break even, but in reality the truth is that it is hard to even achieve 30% IRR consistently.
  • The essential takeaway here is that your winners need to be heavy multipliers of the amount you’re putting into them. As they will need to generate you a return of 30–40% so that you can stay on the path to access carry.

Here is the Bad News…

The bad news is that in our figures above, you wouldn’t make any money. You would simply return your fund but getting to carry would be an almost impossible feat due to the level of estimated returns you will need.

Although these figures are estimated they do show the basic figures that most funds are having to deal with. The brutal truth is that many funds have struggled to hit 30% IRR in the last few years and a lot of funds have been unable to bring back returns of 1.8x.

“So getting to carry is a luxury that only a few funds actually get access to.”

But the Good News is…

Things are looking up for VC’s because historical data shows that when there is turmoil in the market you will have overly high returns. So post-COVID is a good time to either start a fund or join a fund!

Final Words of Wisdom

Despite the high barriers to entry if you are managing a successful fund, Manuel’s final words of wisdom were filled with encouragement:

You shouldn’t be discouraged about becoming a VC. You can achieve your goals if you aim to be unique. Be bold and creative. Always think of how you can go the extra mile for entrepreneurs? What piece of advice can you give them? What moral support, what friendship can you build with them. Allow yourself the freedom to be intellectually curious and stay connected with entrepreneurs who are not in your traditional framework. Lastly, embrace your diversity and use it as a strength.

About Manuel Silva Martínez

Manuel oversees the investment team and sourcing and execution of new investments, as well as all regulatory and operational aspects of the fund. Before joining Santander InnoVentures in 2015, Manuel was the founding member of BBVA Ventures out of San Francisco, which he started after spending 5 years at BBVA in Corporate Development and Innovation functions. He holds a B.A. in Business Administration from CUNEF (Madrid), an MPhil in Philosophy, Politics and Economics from Sciences Po (Paris) and has conducted doctoral level research on Chinese Economics at the Chinese University of Hong Kong.

About Mouro Capital

Mouro Capital spun out of Santander (it used to be Santander InnoVentures) in 2020 and now operates as an independent fintech fund. The firm backs entrepreneurs who are shaping the future of financial services. With $400m in assets under management, they lead early to growth stage businesses across Europe, North America, and Latin America.

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