The realities of raising a $10M VC fund

Most conversations about launching a VC fund focus on thesis, portfolio construction, and value-add. Very few focus on the structural reality of the vehicle you are raising into.

This article is about that.

If you have decided to set up your fund in the US (Delaware specifically) because your LPs are US-based or your target companies are US-registered, here is what the structure actually means for your fundraise.

Why Delaware

Delaware is the default for US-based VC funds. The legal infrastructure is established, LP agreement templates exist, institutional investors understand the structure, and Delaware courts have a long track record on partnership disputes. According to VC Lab data, over 60% of new venture capital managers globally choose Delaware as their domicile.

The standard setup is a Delaware limited partnership as the fund vehicle, with a Delaware LLC as the general partner entity. The LLC matters. It is the entity that signs term sheets, holds the management fee, and eventually receives carried interest. It should be separate from every other business you run.

Formation typically costs $15,000 to $25,000 in legal fees for a lean setup. That is the baseline. What comes next is where most first-time managers are caught off guard.

The 99-investor rule

The Investment Company Act of 1940 governs how investment funds are regulated in the US. Most private funds seek an exemption from full SEC registration. The most common exemption for emerging managers is Section 3(c)(1).

To qualify, your fund must have no more than 100 beneficial owners. In practice, lawyers round this down to 99 to account for the GP interest potentially being classified as a security. That ceiling is not soft. It is a hard legal limit.

This is not a technicality buried in your LPA. It is the single most consequential constraint on your fundraising strategy. It runs before you send a single deck.

The check size math

Here is the implication most managers miss until they are 20 LPs in.

$10,000,000 ÷ 99 slots = ~$101K required average check size.

You cannot take $5,000 here and $10,000 there and claw your way to $10M. This is not a startup round. Every slot has a cost.

Take one LP at $25K. Someone else now has to write $175K just to get you back to average. Take five friends at $50K. Five slots consumed. $250K raised. The remaining 94 LPs need to average $104K each to reach $10M.

When Elizabeth Yin co-founded Hustle Fund, she opened Fund I with $25K minimums and had to turn away investors she genuinely wanted in the fund. Not because they lacked value. Because every slot counts.

Most first-time managers learn this 20 LPs in. After the damage is done.

According to PitchBook, the median time to close a first-time VC fund reached 15 months in 2023, a 46% jump from 2021 and the longest in over a decade. The slot problem compounds the timeline problem. Every misallocated slot extends your fundraise.

Your three structural lanes

The 99-investor limit is not the only structure available to you. It is the default. Three lanes exist under US law, plus a parallel fund structure for managers who need both.

3(c)(1) traditional: the default lane

No cap on fund size. All accredited investors eligible. An accredited investor is an individual with income above $200,000 annually, or net worth above $1M excluding their primary residence.

The binding constraint is headcount: 99 slots. That is your entire fundraise.

Qualifying VC fund (QVCF): the small fund exception

A sub-lane within 3(c)(1), created by Congress in 2018. A qualifying fund can accept up to 250 investors instead of 99. That meaningfully changes your implied minimum check size to around $40K on a $10M fund.

Important: many published sources, including Carta’s own reference article, still list this threshold as $10M. The SEC updated it to $12M in August 2024. FundFlow’s article reflects the current rule.

To qualify, your fund cannot exceed $12M in total committed and uncalled capital, and your investment strategy must meet the legal definition of a venture capital fund: no more than 20% of committed capital in non-qualifying investments, leverage capped at 15% of fund size, and LP redemption rights limited to extraordinary circumstances. Most seed-stage funds naturally comply.

The catch: this is a one-fund solution. Once you raise Fund II above $12M, you lose the exemption.

3(c)(7): the institutional lane

No hard cap on investors. But every LP must be a qualified purchaser: an individual with $5M or more in investments, or an entity with $25M or more. That threshold rules out most individual angels, most diaspora investors, and most high-net-worth individuals who are accredited but have not crossed $5M in investable assets.

This is not a first-time manager lane unless your LP base is genuinely institutional from the start.

Fund 1A + 1B: the parallel structure

Two vehicles running simultaneously. Fund 1A under 3(c)(1) accepts accredited investors, 99 slots. Fund 1B under 3(c)(7) accepts qualified purchasers with no hard investor cap. Both invest pro rata in every deal on identical terms.

Set up the parallel structure at formation if you need it. Adding Fund 1B after the fund is operational requires forming a new entity, re-opening a securities offering, and restarting fund admin. The additional legal fees run $20,000 to $40,000 at minimum.

The entity look-through rule

One operational trap that trips first-time managers: the 99-investor count is not always as simple as counting individual LPs.

If an entity invests in your fund, you may be required to look through that entity and count its individual investors toward your 99. Specifically, if the entity was formed primarily to invest in your fund (defined as holding more than 40% of its assets in your fund), the SEC treats its underlying investors as direct investors in yours.

A pooled vehicle routing 30 individual investors into your fund does not give you one slot. It gives you 30. Managers who try to aggregate small investors through a single SPV to preserve headroom often accelerate the problem instead of solving it.

The budget reality

The investor slot problem is the structural constraint. The budget reality is the financial one. Both operate at the same time.

The standard management fee for a VC fund is 2% of committed capital annually. On a $10M fund, that is $200,000 per year. This is not your salary. It is your total operating budget.

From that $200,000, you cover your salary, any team costs, travel, legal, annual audit ($15,000 to $25,000 alone), fund administration ($10,000 to $20,000 per year), software, compliance, and Delaware franchise fees. What remains after those fixed costs is what you actually take home.

Elizabeth Yin said it plainly: her salary at Hustle Fund was less than what she earned at her first job out of college in 2004. That is the financial reality of a $10M fund, even a well-run one.

The management fee typically steps down after the active investment period, usually year five, reducing further in later years when the portfolio is maturing but still requires active management. You are not locked in at $200K indefinitely. You are locked in at $200K or less.

This is why managers who succeed on Fund I raise Fund II. Not for ego. Because the only way to improve your economics is to grow the AUM.

If your LP base is Africa-focused

Most of the rules above apply universally. This section is for managers whose natural LP pool sits at the intersection of diaspora capital, DFIs, and US-based family offices writing smaller cheques into Africa-focused strategies.

The 99-investor rule hits differently here.

Diaspora investors are frequently accredited by income or net worth. They are rarely qualified purchasers. That keeps you in 3(c)(1) standard or QVCF territory. But their average cheque size tends to run $25K to $75K, well below the $101K implied minimum on a standard $10M fund.

DFIs (the IFC, Proparco, British International Investment) are almost always qualified purchasers and can anchor a 3(c)(7) or 1B vehicle. But DFI commitment timelines run 12 to 24 months from first conversation to close, and they come with their own reporting and ESG requirements that add operational overhead.

Family offices writing $100K to $250K cheques into Africa strategies exist, but sourcing them takes longer than for managers with established Sand Hill networks. PitchBook data shows first-time managers can take up to two years to close their inaugural fund. Africa-focused managers frequently report timelines at the longer end of that range.

The structural implication: if your LP base is a mix of diaspora angels, one or two DFIs, and a handful of family offices, your slot allocation requires more strategy than most fund formation advisors will tell you. Prioritise your highest-cheque commitments first. Every slot below $100K is a debt paid by someone writing above the average.

One more consideration: if you are an Africa-focused manager investing in African-registered companies but raising from US LPs, a Delaware fund with a Mauritius or Cayman feeder structure is worth exploring with legal counsel. The feeder structure adds cost and complexity but can unlock tax treaty benefits and widen your LP pool to non-US investors without disrupting your US fund structure.

Three questions to answer before you open your data room

1. What is your realistic LP base? Map your LP pipeline by investor type and likely check size before you set your minimum. If the majority of your LP conversations are below $100K, you are either in QVCF territory, the parallel structure, or you need to re-tier your outreach before you formalise.

2. What is your target fund size now and on Fund II? If you are raising $10M or less with a strategy that meets the VC fund definition, the QVCF exemption gives you 250 slots and a $40K implied minimum. If you plan to raise $20M on Fund II, you are already outside the QVCF cap on the next fund. Structure Fund I with that growth in mind.

3. Will you have institutional LPs from day one? If you have confirmed interest from DFIs or family offices that qualify as purchasers, the Fund 1A/1B parallel structure is worth the additional formation cost. If your LP base on Fund I is entirely individual accredited investors, 3(c)(1) standard is simpler and cheaper.

The bottom line

The 99-investor rule is not a bureaucratic detail. It is the first constraint on your fund strategy. It operates before you write a single check.

It determines your minimum LP check size. It determines your structural lane. It determines whether the parallel structure makes sense at formation. It shapes your LP outreach from the first conversation.

Your LP list is not your strategy. Your fund structure is.

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