How VCs Make Money: Fees, Carry & Returns

Imagine you’re watching a reboot of Friends, but instead of Central Perk, the gang hangs out in a sleek WeWork. Monica’s running her own D2C cookware startup, Ross is trying to get a paleontology AI tool funded, and Joey’s accidentally become a tech influencer.

Now, imagine Chandler walks in and says,

“Could I be any more into venture capital?”

Suddenly, everyone’s listening. Because while startups are cool, how VCs make money,now that’s the real mystery.

Let’s pull back the curtain.

How VCs Make Money: The Basics You Need to Know

Before we get into the millions (or losses), let’s start with the setup. A venture capitalist (VC) doesn’t just throw their own money at startups. They manage a VC fund, a pool of capital collected from Limited Partners (LPs) like pension funds, university endowments, and billionaires who are too busy buying art.

The VC becomes the General Partner (GP), managing this fund, investing it into startups, and ideally turning it into gold. But they’re not doing it out of love for pitch decks. There are two main ways VCs make money: fees and carry.

How VCs Make Money: The 2% That Pays the Bills

This is the predictable, steady paycheck: the management fee.

Most VCs charge 2% annually on the total fund size. So, if a VC is running a $100 million fund, they earn $2 million every year, regardless of whether the investments succeed or crash and burn like Joey’s “Ichiban” commercial.

This money pays for:

• Salaries and team

• Office rent (or a vibey co-working space)

• Travel to pitch events and demo days

• Dinners with founders (and sometimes overpriced cold brew)

It’s like Chandler’s job in data processing; nobody understands it, but it keeps the lights on.

How VCs Make Money: The 20% That Changes Everything

This is where the real magic (and risk) lives: carried interest, often just called carry.

Carry is 20% of the profits a VC makes after returning the original investment to the LPs. Think of it as a bonus for doing your job exceptionally well, except the bonus could be tens of millions of dollars.

Here’s an example:

• A VC fund raises $100M

• Over 10 years, it turns into $300M

• First, LPs get their $100M back

• The remaining $200M is the profit

• LPs get 80% of that = $160M

• VCs get 20% = $40M in carry

That $40 million isn’t split among dozens of people. It might go to just a few partners at the firm. This is why VCs chase unicorns like Monica chases the perfect soufflé; it only takes one success to rewrite their entire future.

How VCs Make Money: But Only If Startups Win

Here’s the catch: carry is never guaranteed. If the fund only returns the original $100M, the VC gets zero carry. That’s why VCs are incentivized to chase big, risky bets.

Most startups fail. That’s baked into the model. But if one company becomes the next Stripe or OpenAI, it could return 50x, 100x, or more. That’s the dream. That’s the Friends-season-finale kind of payoff.

And that’s also why VCs pass on perfectly good “steady” businesses, they need massive wins to make the carry worthwhile.

How VCs Make Money: Timing is Everything

Here’s another twist: VCs don’t see their carry for years. A VC fund has a lifespan of around 10 years:

• Years 1 to 4: Investing

• Years 5 to 10: Waiting for exits (acquisitions or IPOs)

So even if they back the next Canva, they might not get paid for 6 to 8 years. It’s like Ross waiting a decade to tell Rachel how he feels.

VCs often raise multiple funds in overlapping cycles to smooth cash flow, but make no mistake, this business has long feedback loops.

How VCs Make Money: When the Fund Flops

Not every fund is a hit. Some VCs never earn carry. If all the startups underperform, the only money the VC earns is the management fee, and that’s often just enough to survive, not thrive.

This is why new or smaller VCs hustle harder than Joey at auditions. They know their long-term wealth depends on carry, and carry depends on finding the one, that single outlier startup that changes everything.

How VCs Make Money: Why It Matters Beyond Startups

You might not be pitching a startup anytime soon, but knowing how VCs make money helps decode a lot of the business world:

• Why do some startups raise so much capital

• Why VCs chase growth over profits

• Why unicorns are treated like royalty

• Why "exit" is the endgame

It’s not just about innovation, it’s about returns. Every decision has a spreadsheet behind it. Even passion projects need a path to payback.

TL;DR: How VCs Make Money in One Chart (Okay, One List)

• Management Fees (2%): Paid annually for managing the fund, regardless of performance

• Carry (20%): Share of profits earned after LPs get their money back

• No Carry = No Big Payday: Most wealth in VC comes from carry, not salary

• Timing is Slow: It can take 8 to 10 years to realize returns

• High Risk, High Reward: One winner can carry the fund, and make the VC rich