Fund of Funds
A fund of funds (FoF) is an investment vehicle that invests its capital into other venture funds rather than directly into startups. Sometimes called a "feeder fund" in specific structures, it can also invest in PE funds, hedge funds, etc., providing institutional access and diversification benefits to LPs while adding a layer of fees ("fees on fees") on top of the underlying fund economics. It is a meaningful LP category for venture funds, particularly for smaller institutional and individual LPs who want diversified venture exposure without the access constraints or due-diligence burden of investing directly in multiple funds.
The structural mechanics: a FoF raises capital from its own LPs (institutional investors, family offices, individual accredited investors), then invests that capital across a portfolio of 10-30+ underlying venture funds. The underlying funds invest in startups; returns flow back through the underlying funds to the FoF, then through the FoF to its LPs. The fee structure: each underlying fund charges its own 2 and 20 (management fee + carry); the FoF then charges its own fee (typically 0.5-1.5% management fee plus 5-10% carry on FoF-level returns above hurdles). This means FoF investors pay fees twice, dampening net returns significantly. The structural value: FoFs provide access to top-tier funds with high minimum commitments or closed LP slots, diversification across multiple managers and vintage years, expertise in fund manager selection (the FoF GPs are professional fund pickers), and administrative simplicity for LPs who don't want to manage relationships with dozens of underlying funds. Famous FoFs in venture: Horsley Bridge, Greenspring Associates, Top Tier Capital Partners, Cendana Capital, RockPort Capital, StepStone, HarbourVest, Adams Street Partners, Foundry Group's Foundry Group Next, and many family-office or endowment-sponsored FoFs. The 2020s reality: FoFs have faced pressure as direct investing became more accessible and fee-conscious LPs sought to avoid the fee-on-fee structure. Many large LPs (pension funds, large endowments) bypass FoFs and invest directly in underlying funds; FoFs remain useful for smaller institutional and individual LP investors.
Ryan's Take
Fund of funds is the LP category that gets you exposure to top-tier venture funds you couldn't access directly, at the cost of paying fees twice. For a $5M family office that wants venture exposure across 20 funds without managing 20 relationships, a FoF makes sense even with the fee drag. For a $500M endowment that can hire a venture team and access funds directly, the fees usually don't justify the FoF structure. The right answer depends on scale, expertise, and access. The fee-on-fee structure is real and meaningful; don't ignore it when comparing FoF returns to direct fund returns.
What founders get wrong: Treating FoF LPs the same as direct-fund LPs when raising. FoFs are more removed from the actual investment decisions (their underlying funds make those calls), so the relationship dynamics differ. FoFs typically don't have direct access to portfolio companies and don't take board seats at the portfolio level. The relationship is mediated through the underlying fund GP.
Related: Limited Partner · Venture Capital Fund · Venture Capital
FAQ
What is a fund of funds?
An investment vehicle that invests its capital into other venture funds rather than directly into startups. Provides institutional access and diversification benefits to LPs while adding a layer of fees on top of underlying fund economics. Sometimes called a feeder fund in specific structures.
Why use a fund of funds instead of investing directly in venture funds?
Access (FoFs can get into top-tier funds with high minimum commitments or closed LP slots), diversification (across 10-30+ underlying funds and multiple vintage years), expertise (the FoF GPs are professional fund pickers), and administrative simplicity (one LP relationship vs many). Useful for smaller institutional and individual LP investors.
What's the cost of using a fund of funds?
Fees on fees. Each underlying fund charges 2 and 20; the FoF then charges its own fee (typically 0.5-1.5% management fee plus 5-10% carry on FoF-level returns above hurdles). Total fee drag is significant. Larger LPs that can access funds directly typically bypass FoFs for this reason.
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