[anothermachine]

That seems insane. Why would a wealthy (and presumably intelligent) investor hand over 20% of gains to someone with no skin in the game?

I guess if the VC had a track record from which to estimate expected returns, it could be a big deal, but no one has a track record, because these business cycles are so short.

If were a multi-millionaire, why wouldn't I say "Hey Mr. VC, if you think you can turn $100M into $400M, why don't you borrow it from me and pay 10% interest?"

[sethg]

You can usually get a 10% annual return by investing in regular stocks. The kind of investors who put their money in VC firms are looking for higher returns.

Let’s say I invest a million bucks in my local VC fund, and its investments earn back an annualized 15%/year over ten years. My million bucks has turned in to a little over four million. After paying the fees, I would still be about a million dollars ahead of someone who got a 10% return from a regular mutual fund.

[damoncali]

It's not really 20%. It's 20% of whatever is left after the limited partner clears their hurdle rate. And to a degree, it is a bit insane, especially when you look at the historical returns of venture capital. But you'll find similar structures throughout the finance world - hedge funds, real estate, leveraged buyouts, etc.

To me, the crazier part is the 2%.