Four Years of Paying More Than You Receive: The Private Capital Fee Problem

If you’re an investor, you’re overpaying. This isn’t by accident, it’s the result of traditional venture capital's “exit optimization” strategy, and lack of adjustment by most VC firms to an evolving industry. 

This has presented itself as a disadvantage to investors. Since 2022, US VC fund managers have called for 1.6x more capital than they have distributed. In numbers, over the past 4 years US VC firms have drawn $196.9 billion more from investors than they have returned, a prolonged capital deficit unprecedented in VC’s history. Unfortunately, this issue is feeding a vicious cycle. In 2025, venture capital saw the fewest fund closings in a decade, with $138 billion raised across 1,257 funds. Investors, not seeing returns from prior fund commitments, are now reluctant to invest in new funding rounds. This lack of fundraising limits fund managers’ capacity to invest in the operations of their portfolio companies. As a result, start-ups do not have the fresh capital needed to adjust business strategy and grow at scale, instead becoming stagnant. 

The industry trends of the past few years mentioned above are not random. They’re a result of structural issues in the VC business model exploited by recent market shifts. The market trend most visibly exposing flaws in VC model structure is portfolio companies staying private for longer due to diminishing appeal of public markets. Traditionally, investors received payouts within 5-7 years, when companies went public on the stock market or were acquired. Holding periods are now much longer. In 2025, the average time for VC-backed companies to hold an initial public offering (IPO) was 12 years. This market force blended with traditional VC fee structure creates issues for investors. To illustrate how, a hypothetical example is given below.  

Let’s say a VC firm commits $1M to a fund, and a limited partner (LP) commits $99M. 

• On this $100M total fund, an annual 2% management fee is charged, bringing in $2M per year to the VC firm, with no performance requirement from the fund. Assuming the fund isn’t closed for 10 years, these fees total $20M before investors ever see returns. 

• This leaves $80M in deployed capital for the VC firm to invest in portfolio companies. 

• For the VC firm to earn carried interest, the fund needs to break even first, and $100M must be returned to the LP.

• Let’s say the fund exits and returns $300M at close, gross profit equals $300M minus the $100M committed, so $200M. 

• Since the bare minimum return was fulfilled, carried interest is taken, so 20% of $200M yields $40M in revenue for the VC firm, plus the additional $20M in management fees, $60M total. Of the $300M profit, $260M is given back to the LP after carry. 

  
  

Using this example, long holding periods make the discrepancy in returns from this fee structure enormous. For the LP on a $99M commitment, they receive back $260M, a net multiple of 2.6x. However for the VC firm, on a $1M commitment they received back $60M, a net multiple of 60x. When adding in that since 2021 only 26% of technology company IPOs were profitable at listing, it’s not surprising many fund managers hold off on taking their portfolio companies public, their fee structure is just too good of a deal. 

The other facet of the traditional VC business model that benefits fund managers is the “Power Law”. This law states that typically 1-2 companies return the entire value of the fund via an exit or acquisition. On the flipside, 60%-70% of investments are not expected to generate any returns. Unfortunately, these typical industry results might have to be adjusted. US tech IPOs fell from 1,598 in the 1990s to just 227 in the 2020s. With such a low amount of IPOs, the chances of there being even 1 company returning the entire value of the fund is very low, and there’s a high likelihood it would take over 10 years for it to happen. With most companies in a fund not generating any returns and current lack of IPO events, the traditional fee structure discussed above benefits fund managers even more than we already found, with no profit at all ever realized for LPs.

The above is proof enough that the VC model should change – to the benefit of investors and great innovations. With us, that change is possible. If you want to learn more about how your investments can stop becoming a decade of paying fees with no returns, visit tigervc.com.