Ask HN: How much money does an average VC make?
How much money does an average VC make ? And how much does the top VCs make and how much personal wealth do they accumulate over their tenure as a VC.
VCs are paid in two ways:
1) Management fees. 2%/year of funds under management is common. (Over the ~10yr life of a fund, that's ~20% of the capital.)
2) Carried interest. This is a share of the profits on the fund before the money is returned to investors. The typical number here is 20%.
So, let's imagine a fictional $1B fund. Here's how the numbers might work out.
Y-0: Fund is raised. VC contributes $10M for 1% of the fund.
Y-0: 2% management fees are used to cover expenses / pay VCs.
Y-1~2: Fund invests in stuff, takes additional 2% management fees every year.
Y-2~9: Fund is depleted for new investments. Continues to take 2% management fees every year.
Y-10: Fund's last investments exit. Overall, the fund returns a 50% profit ($1.5B, with $500M in profit). VCs take $15M for their original contribution, and an additional $100M in carried interest. So far, they've also taken $200M in management fees (2% a year for 10 years). Total profit: $305M.
2) On the carried interest often the VC fund can only earn that after they've returned a certain amount to Limited Partners (called a "preferred return", and typically ~8%; if they don't return an 8% IRR to LPs, they only get the management fee and whatever they earn on their own out-of-pocket contribution.
In general I'd just add that this is a highly negotiated point for each Fund and differs from firm to firm and fund to fund.
Source: I work as an advisor to investors who participate as LPs in VC funds.
Also, is there a good way to find out who is about to start raising money for new funds, and where in the lifetime of their fund a particular partner might be? (As in, have they just raised money and are looking for the first couple investments, or is the investment period about to close and the fund's capital has all been invested?)
If you are not an active investor, getting quality access to information about funds can be difficult. I'd recommend the firm's website and crunchbase as free datasources. There are other, higher quality sources, but you need to pay for access (e.g. dow jones venture source).
In a way, a lot of these funds are entrepreneurial ventures as well. It's not too hard, for 1-2 people who knows plenty of wealthy individuals, to raise a $25-50M fund. You'd be amazed at how much money is available in the world (pension funds, wealthy families, endowments, etc etc)
So, the math tends to be a 2-20 (management fee / carry).
Let's say this fund returns $100m over a period of 5 years:
Fund size: $50M. Y1-5: Management fee (used for salaries + general expenses), 2%: $1M per annum (- expenses, e.g. secretary, travel, etc). To be divided between two partners. For a small fund, this is probably $200-300k per annum, per partner. Not bad, but not amazing either, given you just spent 1-2 years raising all that money.
When the fund is liquidated, the fund managers receive 20% of the capital gain. They first return the $50m initial capital, and then get 20% of the $50m they made, i.e. $10M (split between both partners).
Partners usually also invest some of their own money. It's rare to see funds where the principals don't have capital invested (this aligns incentives)
Edit: same math applies to private equity funds, where deals tend to be less risky than in VC. (for the fund, not the acquired company)
Yes, though in my opinion, this is one of the dirty secret of the VC world. The GP contribution, after taking into account their fees, is essentially negative.
Let's take a more generous example where the GP contributes 5% of the fund. After 10 years of 2% fees, the GP has put in 5% and taken out 20%, so their net contribution is essentially -15%.
Unless I'm misunderstanding what you're saying, I think you're confusing the carry and the management fee. you can't add/subtract those percentages, because they're not representation the same base quantity (ie, they're percentages of different things).
EDIT: Nevermind, I read "the GP has put in 5% and taken out 20%" as referring to a hypothetical carry of 20%.
Ostensibly, the 2% management fee goes to the firm and is intended to cover operations, business expenses, and overhead, rather than individual compensation for the partners. On the other hand, the money they put in does come from them individually (and the carry goes back to them individually as well). They're not supposed to be using the management fee to compensate themselves personally in the way that -20% + 5% would imply.
I won't pretend that there aren't partners and/or firms who abuse this, but that's not the way it's intended to work. And if they don't use that fee to cover all necessary operations first[0], it constitutes outright fraud and the LPs would sue.
[0] And there are a lot of expenses - running a venture firm may be lucrative in the long run, but in the short run, it's expensive!
When there's no cost to moving them, yes, but that's not the case here: We're talking about the VCs personally, and the money that is in the hands of the firm is not worth the same to the VCs personally. Even if they could take the entire amount with impunity, they'd still be taxed on it as income, meaning that they'd lose as much as a third (depending on their marginal tax rate), so 15% is already incorrect from the start.
But on top of that, they're not able to pocket all of that money, because they have a fiscal responsibility to use it in the interest of the fund's shareholders. The same is not true about their personal bank accounts (which is where the 5% comes from).
Dollars are fungible, but that doesn't mean that $1 in a highly restricted fund is the same as $1 in an unrestricted fund. The former is worth some amount less (the discount determined by the premium associated with the restriction).
If that last paragraph weren't true, by the way, money laundering schemes wouldn't lose any money due to attrition, and corruption would be essentially "free". But thankfully, that's not the case - people who embezzle money have less than 100% yield. (Not always a lot less, but still less).
> management fees aren't just for expenses
If LPs can show that a VC is neglecting necessary expenses and instead pocketing the management fee - as 5%-20% = -15% would imply - then the VC had better figure out how he's going to pay his lawyers, because the LPs have got a great lawsuit on their hands.
I didn't say that they were neglecting expenses, only that they spent some of the management fee on things that were not expenses.
> fiscal responsibility to use it in the interest of the fund's shareholders
I don't think that's true but it's easy to argue that the transaction is in the interests of LPs.
> they could take the entire amount with impunity, they'd still be taxed on it as income
I suspect, like private equity firms, they net the transactions or use some other tricks to avoid taxes. So I could offer you a rebate on management expenses and in return get 5% of the fund.
1/ If the lifetime of a fund is 10 years, partners don't get the management fee for ten years. They get the fee until the fund is fully invested (usually 5-6 years).
2/ Money in is capital, money out is taxable income (unless it's carry, then it's a repayment of capital/capital gains). If the fund returns nothing, you lose your capital.
This creates following situation:
1/ 2% * 5 years is 10%, meaning as a partner you make 5% (probably a lot less, since you need to deduct expenses).
2/ Once we take into account taxes (let's say ~25% on $x), you are not making much, because your 10% becomes 7.5% after taxes.
But GPs can't invest 5% in a fund of a few billion $/€. Then again, you can't raise that kind of money without a track record, so maybe it doesn't matter.
My understanding is that the 2% management fee only applies to funds invested. If they raise $1B, but it takes 5 years to make all the investments, they only get the full 2% in years 5+.
If you put together a $50m fund, and haven't invested anything (you're working on sourcing deals) then you still need cash to turn on the lights. That's essentially what the management fee is for. You shouldn't be making money on your management fee.
This gets 'abused' quite a bit when it comes to larger multi billion $/€ funds, but for smaller funds, this should definitely be the case. Also the reason why for larger funds management fees sometimes get pushed down to 1.5-1%
Another thing that sometimes happens as well is that the fund partners get paid their carry when they liquidate an investment in year 3-5, before the entire fund is liquidated.
http://www.quora.com/Are-management-fees-based-on-committed-...
As wealth changes hands over time, this expectation may change.
The startup world isn't encouraging of founders who take high salaries or who take money off the table..
Some of this exorbitant salaries could have been paid to extend the runaway of key startups and generate better returns.
Surely the Lp's should look at such high salaries as exorbitant..
[0] - Secret App that has since closed shop
I think the well known firms tend to earn LPs good money, but aggregated it's bleaker. So although money-losing VCs still earn management fees (until they close down), earnings are lower than the example.
https://hbr.org/2014/08/venture-capitalists-get-paid-well-to...
For the same reason people play any lottery: they don't look at the expected value, they look at the outliers and think, "That could be me, but only if I buy a ticket."
I guess you could ball park 5 partners per fund and therefore 4% carry per partner but that's probably not accurate because the carry distribution likely rewards partners in proportion to the success of the companies that they sourced or on whose boards they sit. Also you want to give a little bit to associates and junior partners.
Carry is not guaranteed but if the returns are positive you will get something (and 20% of a middling 5% return is still a lot of money on a billion dollar fund.) In any case carry is valuable in VC because they are like free call options on very volatile assets and option value increases with volatility.
It's difficult to calculate how much VCs are getting from carry because fund returns are closely guarded secrets.
All this said it's pretty tough to break-in to top VC firms.
[^] https://server1.tepper.cmu.edu/seminars/docs/VCSDF_2.pdf
Quick math...
"In 2013, 153 early-stage funds in the US raised US$9.4 billion" Going with the mean (even though median is better) suggests the average fund is ~$60 million. Let's say that a firm runs 2 concurrently. 2013 was a boom year, so let's say the last fund was $40. So it's 100mm under management. They keep 2% of funds under management, and get 20% carry. Let's say that the funds appreciate 10% a year (we're talking mean - it may actually be lower). That means 2% of 100m = $2mm in management fees and 20% of 20% of 10% of 100m = $2mm in carry. (I'm ignoring compounding, but let's let that slide) The firm has $4mm to pay rent, fancy trips, business dinners and nice salaries. If the firm invests the $100mm in 20 deals, perhaps it needs 5 partners (4 boards per partner?) and 5 associates. Let's call the fixed overhead a half million dollars? That leaves $3.5 million - perhaps each partner takes home $500K and each associate $200K? Or $600K per partner and $100K per associate?
My informal intuition is that the top partners do much better, while most folks do a little worse. We're also in a boom time now because great investments are being harvested, and lots of money is entering the sector. Net - they're doing good in both carry and management fees.
This may sound a lot, but generally the private equity folks earn more.
[0] http://www.forbes.com/profile/john-doerr/ [1] http://www.ey.com/Publication/vwLUAssets/EY-venture-capital-...
Edit: this is for an Angel Investor, SeoxyS explained better the concept of general VCs
PDF copy here: http://www.kauffman.org/~/media/kauffman_org/research%20repo...