Fund of Funds
An investment vehicle that invests in other venture funds rather than directly in startups.
A fund of funds raises capital from its own LPs and deploys it as an LP into a portfolio of underlying venture funds, rather than investing directly in companies. It gives investors — often institutions or individuals who want venture exposure without the expertise or access to evaluate individual GPs directly — diversified access across many funds and strategies through a single commitment.
The tradeoff is an added layer of fees: LPs in a fund of funds pay fees to the fund-of-funds manager on top of the fees and carry already charged by each underlying fund, which compounds and meaningfully reduces net returns compared to investing directly in top-tier funds.
Funds of funds exist because access and manager selection are genuinely hard. The best venture funds are often oversubscribed and relationship-driven, and evaluating dozens of emerging managers takes a team most investors don't have. A good fund of funds solves both problems at once — but it has to earn its second fee layer through selection and access the LP couldn't replicate directly.
Diversification alone doesn't justify the fees. Spreading capital across mediocre underlying funds at two fee layers produces reliably mediocre net returns. Compare net to net: a fund of funds' gross performance can look strong while net returns after both layers are unremarkable.
They aren't only for small investors. Large institutions use funds of funds for specific jobs — backing emerging managers, filling vintage-year gaps, or getting exposure in regions where they don't have a local team.
Hypothetically, an LP commits $10M to a fund of funds charging 1% a year. Over ten years, that top-layer fee alone is about $1M — 10% of the commitment — before any fund-of-funds carry, and on top of every underlying fund's own management fees and carry.
Fund of funds structures make the most sense for LPs who genuinely lack access to top-tier venture funds directly — for those who can get into strong funds on their own, the extra layer of fees is usually not worth the diversification benefit.
Why would an LP use a fund of funds instead of investing directly in venture funds?
Mainly for diversified access and manager selection expertise when the LP lacks the relationships or resources to get into top-performing funds directly — the cost is an added layer of fees on top of the underlying funds' own fees.
Is a fund of funds the same as an SPV?
No. An SPV usually pools investors into a single investment. A fund of funds builds a diversified portfolio across many underlying venture funds as its core strategy.
Do funds of funds actually get into the best venture funds?
It varies enormously, and it's the central diligence question. Ask for the underlying fund roster and check how much of it is genuinely hard to access on your own.
Related terms
Run the numbers yourself: dilution, SAFE conversion, and fund-returner calculators.