What is a Fund of Funds?
A fund of funds (FoF) is an investment vehicle that allocates capital across multiple venture capital or private equity funds rather than investing directly in startups. The FoF acts as an LP in several underlying funds, giving its own investors diversified exposure to venture returns.
Think of it as a portfolio of portfolios.
Why Fund of Funds Exist
Not every investor can access top-tier VC funds directly. Many funds have minimum commitments of $5-25M and are oversubscribed. FoFs aggregate smaller checks into institutional-sized allocations, giving pension funds, endowments, and family offices access to managers they couldn't reach alone.
FoFs also solve the diversification problem. Instead of betting on one fund's strategy, investors spread risk across multiple managers, stages, sectors, and vintages.
The Double Fee Problem
FoFs charge their own management fee (typically 0.5-1%) and carry (5-10%) on top of the underlying funds' fees (2% management fee, 20% carry). This layered fee structure eats into net returns.
- Underlying fund fees: 2% management + 20% carry
- FoF layer: 0.5-1% management + 5-10% carry
- Total drag on returns is meaningful over a fund's life
Why Founders Should Care
FoFs are often LPs in the funds that write you checks. Understanding the LP stack helps you understand your investors' incentives and constraints. A VC backed heavily by FoFs may face different return pressure than one backed by direct institutional LPs.
FoFs also increasingly co-invest directly alongside their underlying funds, meaning they can show up as additional capital in your round.
Example
A $200M fund of funds allocates across 15 VC funds:
- 5 early-stage funds ($10M each)
- 5 growth-stage funds ($15M each)
- 5 sector-specific funds ($5M each)
- Reserve for co-investments: $25M
One underlying fund delivers 4x returns. Another returns 0.5x. The FoF's blended return smooths out individual fund volatility, targeting 2-3x net to its own investors after the double fee layer.