
The other problem with venture capital - management fees - ivankirigin
http://www.cdixon.org/?p=443
======
ulf
This is a general problem in finance. People get paid more and more with
raising volume of their work. So they are happy to see it increase. OTOH they
do not take the real risk of their gamble. If they fail, they lose their job,
at worst. So what?

~~~
biohacker42
_So what?_ Nothing. But it is fascinating that there are so many investors not
just willing but eager to give 2% just for showing up.

Why is that? The only reason I can think of, is that there so much cash
sloshing around that it creates excess demand and a shortage of supply.

That's stunning when you consider just how much supply there is in terms of
total number of funds, VC and hedge, etc.

But if shortage of supply is indeed the case, then doesn't that suggest a
great hack would be to provide more supply? Perhaps something like the index
fund equivalent of a VC fund. No management fees and a computer throws money
at the ceiling.

The computer would use a very simple algorithm to cut of complete frauds and
put money in everything else, something will stick to the ceiling.

The question is, could a VC index fund work, and would it be more or less
profitable then the average VC fund?

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snewe
Note that most VC funds have their fees fall as time goes on. Many fees fall
by half after year 5 or 6.

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jdrock
A fund that's able to raise $85M has probably shown healthy returns to its
investors already.

VCs are still incentivized to make good deals due to the carry.

The problem happens when the size of the fund gets too large and there aren't
enough deals for the money available.

~~~
Shooter
"The problem happens when the size of the fund gets too large and there aren't
enough deals for the money available." That's a _big_ problem, though. And
it's just one ugly facet of the overall clusterfork that is the investment
management industry.

My investment firm has a 5/50 fee schedule, instead of the standard 2/20 that
most private equity firms and hedgies use. [The first time I said that to a
potential client, they literally tried to _run_ out of my office - but
couldn't because they were hyperventilating too much. ;-) ]

To explain, we take _50%_ of any _outperformance_ beyond an appropriate
benchmark (S&P or DJIA index fund, for example) with a _5_ year lockup. We
charge an early withdrawal fee if the client wants to pull their money during
the lockup, but there are no management fees. We therefore have no incentive
to grow our AUM beyond what we can invest wisely. Problem solved. We also
don't have to justify how we're "incentivized" out of the corner of our mouth
like most firms do, because we only get paid if we _out_ perform. [FYI:
Starving if you fail is an _incentive_ not to fail. Having to downgrade which
luxury sports car you drive because your carry was weak is not. Declaring
bankruptcy if you fail is an _incentive_ not to fail. Having to postpone your
purchase of a luxury vacation home until next year is not. I personally
wouldn't want to pay some bozo for just coasting along with my money - I would
want results. Why should my client's expect less?]

I like to say "5/50 instead of 2/20" during client presentations, because I
like to see the shock and/or outrage on client's faces before I explain
everything. I'm sick that way. Everyone assumes I mean a 5% management fee and
50% of profits. Fortunately, no one has had a heart attack before I explain
yet.

I love performance-based compensation in ALL industries. Unfortunately, most
industries have at least some restrictions on using it...including _this_ one.
The greedy and incompetent always fight to maintain the status quo, and
sometimes government 'protections' backfire.

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joshu
What sort of investment do you do?

~~~
Shooter
[Private equity investments are only about 20-25% of our total AUM.] Both
straight buyouts and VC. Any stage. A focus on financial and business services
companies that are also strong internet plays. We invest outside that circle,
but sparingly.

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jedc
2% doesn't seem _too_ bad on the face of it... until you realize over the
course of a ten-year fund that 20% (2% * 10 years) of the capital invested by
LPs goes to management, and just 80% to startups.

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rrival
Is 7 figures really considered "pretty rich" on Wall Street?

