Typically, venture funds pay out 2-3% of the capital in annual management fees, and offer 20-30% in carry (profit sharing).
So, let’s look at the table below of various fund sizes, and what those numbers amount to:
A $25 Million fund would have at most $750,000 in management fees to cover all the services we discussed. This may not be enough. However, once we get up to the $50-$100 M fund sizes, the management fees would be enough to cover the expenses of an incubator of the level we’re discussing.
On the positive side, let’s say, only 5 companies are funded out of a $25 Million incubator fund, @ $5 Million each, even if each of the portfolio companies are required to pay $200k / year in fees, it would still be affordable.
What I am pointing us towards is a framework that enables pooling of resources. Really high quality resources.
At the larger fund sizes, the model becomes significantly more complex, and multiple “management teams” would be required per fund. At $200 Million, it may even be viable to run 4 separate incubators in different cities, each with their own management teams.
My personal instinct about the fund size sweet spot is in the $50-$75 Million range, so that interesting, ambitious projects can be incubated and funded up to a point of validation. At the same time, the fund can continue participating pro rata in later rounds without getting diluted. In the sub $50 Million zone, it would be difficult for the fund to maintain its equity position throughout the funding life-cycle.
This segment is a part in the series : Incubator Funds in India