Here's an easy one: 20% of profitable returns, without the 2%. If you don't make the money, you don't get the money.
But the VC fee structure is probably among the most honest and legit setups in all of finance.
Look at Private Equity (PE) fees. In addition to whatever the LPs are directly paying, portfolio companies themselves are posting up huge fees back to the PE firm. Plus dividends, director fees, you name it. "Promotes" for putting a deal together with a syndicate. Etc. etc.
Look at lending. You've got stated rates but all kinds of extra fees, origination expenses, etc. baked in. When your lender gives you an APR, he is looking at a projected IRR that is way higher, I guarantee.
Early stage VCs -- with few exceptions, and those mainly during weird downturn / recap scenarios -- are generally getting plain vanilla convertible preferred stock. No management fees. No origination / finder's fees. No director fees. No promotes.
There are, by the way, some mechanisms for dealing with absurd fees (in VC and other asset classes). They're well known, and already practiced by savvy LPs with leverage.
If you take away the 2% return, you've basically said that only super rich people that can afford not getting paid for 5-10 years should be VCs. Do you think that all the best investors in the world are super rich people?
Also, when to take that 20% is an issue. Perhaps a VC that is strapped for cash would push a company to exit sooner, or sell the stock right after the IPO, so they could take some of their profits off the table and thus get some working capital. However maybe they'd get a better return for both themselves and their investors by waiting another 5 years. Sequoia has very famously said that they've gotten more returns from their companies post-IPO --> now than they have from initial investment --> IPO. If you believe in the long term prospects of a company you essentially want to never sell the stock.
I'm not suggesting there isn't an alternative, but I'd like to see it. The LPs who continually agree to this fee structure aren't idiots.
You can take away the 2% and leave some value value that still pays the investors. The problem with 2% is that the fund managers often taken home %1 type wages without actually performing. A %1 fee with a clause that caps all fund managers salaries at $60k (or some livable wage) ensures that the investors can live, but puts all of the income incentive on their bonuses which is tied to fund performance.
Right, and fund managers will work for free instead. I know quite a few of them and I would not want to trade with them. Spend half your life in transit lounges of airports and the other half in hotel rooms, maybe if you're lucky you get to see your kids on the weekends. I know divorced couples that get more family time than some of the VCs I work with, they're the hardest working people that I know, much harder than most founders.
I suspect that your viewpoint is not illuminated with actual experience of the VC world.
Note that people that made enough money to start a VC fund usually value their time well and if you want to get them to pull your cart for you (as an LP you have to do absolutely nothing) they expect to be compensated for their time.
This really adds up.
Hedge funds are all the same at the end of the day.