

Ask YC: How do you start and run a VC firm? - ideas101

Is there any book or course you can suggest to know the following ...<p>1.whether it is simple to create a VC firm - like couple of millionaire getting-to-gather and start a VC firm?<p>2. What are the roles and responsibilities of partners, management team, limited partners etc.?<p>3. Whether they have to be unanimous in selecting a start-up company to fund?<p>4. How do they distribute profit amongst all these partners, management teams, limited partners, resident CEOs etc?<p>5. Why do they require outside investors or limited partners if they dont have money to invest from their own pocket to begin with?
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tlrobinson
I don't know of any "how to be a VC" books, but here's what I understand about
VCs:

1\. It's easy to be a casual angel investor (typically investing your own
money) but not so easy to be a VC (risking others' money). VCs typically
create funds in the hundreds of millions from a number of large organizations
(pension funds, endowments, etc). A couple millionaires who simply have a lot
of money but no VC experience aren't going to have much credibility when
raising hundred of million dollar funds.

VCs are fiduciaries to their limited partners, so they're responsible for
explaining all their investments. Angels can invest in a company that makes
toothpaste out of poo if they want.

2\. For the same reason, VCs also usually sit on the board of the companies
they invest in. Angels typically don't.

3\. Different VC firms have different policies on selecting which companies to
fund. Some might require unanimity, some majority, some 2/3s, etc.

4\. VCs typically make money two ways: yearly management fees regardless of
how well the fund does, and a certain percentage of the profits of the fund.

5\. VCs are professional investors who invest other people's money. They may
also invest some of their own money, but the majority comes from outside
investors. See #4.

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ideas101
if the management fee is just 2%, is it enough to pay salary to VCs for the
whole year?

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skmurphy
It's 2% per year of typically hundreds of millions of dollars: it pays for VC
salaries and maintains office and staff. Their upside comes from investment
profits. They take 2% of the fund per year, whether or not the fund makes
money. If it doesn't they may have trouble raising an additional fund but
that's a different question. Angel groups have a much different structure
(e.g. Band of Angels, Angels Forum) where each individual investor contributes
a set amount to a particular investment.

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jasonlbaptiste
so heres how it works in short:

there's LPs, those are the investors in the "fund". lets call this fund
"Hacker Ventures". Hacker Ventures puts together an investment thesis, their
focus,etc. and goes out to raise a fund of let's say $400 million dollars. It
will be called Hacker Ventures I. The partners go raise that money from:

-pension funds -universities -mutual funds -very rich individuals -possibly themselves. sometimes a fund requires partners to put in a certain amount, a small percentage. so lets say 2%, that means 8 million from each founding partner.

Raising money for a venture fund is like raising money for your company in a
lot of ways. They need a great team, good track record, thesis
(markets+products),etc. Just because you're rich doesn't mean you can start a
top tier VC firm. It's also about deal flow.

The fund is then raised and investments are made. Out of the money raised 2%
goes towards management fees for salary, travel,etc. The VCs really make their
money off of the carry, which is their cut on an exit. So if Hacker Ventures
invests 5 million at a post money valuation of 15 million in a company well
call YANS, they own 33% of YANS. Let's say YANS is lucky, doesn't need another
round and sells for 300 million, Hacker Ventures makes $100 million. 20% of
the PROFIT is divided amongst the partners. So (100m-5m)*.2 ie- 19 million.

It's nearing 3 am, so going more in depth to how a VC fund works is going to
be hard. Forgive any ignorance, if what ive explained is wrong. correct me and
make me learn, thats why were here :-).

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ideas101
thanks for the explanation - you said 20% goes to the partners, you mean
founders, right? and then what happens to rest of the 80%, does it go to LPs?
and how do partners(founders) earn money on the work they do through out the
year, I mean whether they get regular salary, because it may happen that no
deal goes through 100% through the first couple of years? is it salary comes
from 2% management fee?

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jasonlbaptiste
hey ideas101, so:

a) 20% goes to the partners aka founders of the fund in most cases. b) The
other 80% goes back to the LPs c) Salary is taken from the 2% management fee.
It also covers the very nice expenses, dinners, travel,etc.

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ideas101
may be few friends should just come together and start small (may be $100K) -
a clone of YC is possible to start small - it requires 2 things though - a
vision of founders to pick right startups and few VCs to come on a demo day
!!! what do u say??

