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Ask HN: How much money does an average VC make?
106 points by srameshc on May 9, 2015 | hide | past | web | favorite | 61 comments
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 raise large funds from institutional investors (pensions funds, university endowments, etc.) called Limited Partners (LP). Typically, the VC (also known as General Partner, GP) contributes 1-5% of the fund out of their own pocket, with the rest coming from the LPs.

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.

I'd add a few points: 1) management fees typically decline after the first few years of the Fund, rather than staying at 2% for the entire 10 years. This is to reflect the fact that partners are expected to do more work during the sourcing and diligence portion of a Fund's life (typically defined as an "investment period" after which they're not allowed to make new investments), and that helping portfolio companies and helping achieve exits takes less time / staff / expense. The GP also typically raises subsequent funds once the investment period is over, the management fees of which helps to fund their overall budget.

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.

What's the relationship between VC funds, VC partners, and VC firms? Are funds typically associated with a specific GP, or are they associated with the firm as a whole? Does the firm offer only a single fund at a time, or does a brand-name VC (say, Sequoia, or Accel, or KP) have multiple offerings with different portfolio strategies?

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?)

Established venture firms may have multiple vehicles (e.g. a seed fund, main fund, or growth fund), but the majority of venture firms tend to invest out of one vehicle at a time (there may be a short period of overlap when new funds are raised).

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).

Yes. You can search Form Ds, which are public information.

Good points, although I would note that preferred return is less commonly seen in venture funds but a typical feature of buyout/classic private equity funds.

What's the advisor pay structure like?

One thing to consider is that this is the story when you join an existing VC firm as a partner.

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)

> Partners usually also invest some of their own money. It's rare to see funds where the principals don't have capital invested (it tends to align incentives)

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%.

> 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%.

I'm not. 2% of X * 10 years = 20% of X. The GP contribution is 5% of X. Net contribution is -15%, regardless of fund performance.

I get what you're saying, and the VCs definitely do have a pretty sweet deal no matter how you cut it, but I still don't think it's fair to add those together directly.

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!

Dollars are fungible and management fees aren't just for expenses, they are compensation for running the fund.

> Dollars are fungible

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.

> If LPs can show that a VC is neglecting necessary expenses

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.

I don't think that's a great example.

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.

The portion of management fees set aside to invest in the fund probably aren't taxed because they most likely rebate the management fees in exchange for equity in the fund.

Generally, no.

Fund invests in stuff, takes additional 2% management fees every year.

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+.

Not sure, but I don't think this is correct. I believe this to apply on the entire fund.

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.

Great explanation. Notice how the VC fees eat heavily into the LPs profits. $500M in profit netted only $200M after fees - leaving only a 20% return after ten years. The S&P500 would've easily beaten that rate. A VC firm needs to have a skyhigh IRR before their LPs get their money's worth.

This phenomenon is called the j-curve. Its not that the IRR needs to be sky-high, rather that the fair value of the fund's aggregate investments need to appreciate above the cumulative amount of fees drawn before the IRR can be positive.


So, overall a 2950% return over ten years. I know its a contrived example, but not too shabby if you're lucky enough to be in the club. Wish this scaled down. I'd gladly invest $1,000 today for $30,500 in ten years.

It does scale down - remember, it's not just the initial capital, but also 10 years of work. There are many similar situations where you can get similar returns. My parents spent ~$1000 on programming/CS textbooks for me when I was a teenager, and it made me a whole lot more than $30,500 in additional wages. Pick the right technology platform today and you can spend a couple hundred bucks and end up with a few billion.

The fees (management and performance) shouldn't be considered as "return on investment", but rather as "paycheck for work performed". The founded might as well invest $0 (e.g. if s/he has rich friends or a reputation that makes it easy for him/her to find seed capital), but still reap a lot of profits.

Agreed. On the other hand, is it really 100 times more work to manage an investment of 10 M than one of 100k? 1000 times more work to manage 1 bn than 1 m?

No, but pay isn't based on how hard the work is. It's based on the value provided, and/or on the influence the individual has; and somebody able to attract 1bn is much more influential than someone with just 1m under management.

why are VC's taking 200-300k+ as salaries when founders are expected to subsist on just above avg wage or around 100k?

Part of raising money from (most) LPs requires a bit of showmanship akin to that of Lawyers and Investment Bankers. This goes beyond the taking a "client" out to dinner. It's the expectation of living a specific lifestyle and the perceptions the wealthy have of those asking for money. Also, consider the amount raised (typically XX million+). That usually allows you to pay $200-300k salaries (though whether that's right / justified is a different conversation).

As wealth changes hands over time, this expectation may change.

Well they can charge all the expense to the fund and still take nominal salaries.

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.

Because they can?

I understand that but I can see fellow founders condemn other founders for taking an above avg salary or as was the case with the founders who took $6m [0] off the table during funding...

Surely the Lp's should look at such high salaries as exorbitant..

[0] - Secret App that has since closed shop

This doesn't hold for all of them. As a group VCs, underperform many other asset classes.

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.


50% over 10 years is less than the stock market average. Take away the fund management fees + interest, and investors get a measly 2% per year. Why would anyone put money in such a fund? Is this a realistic scenario or did you just use these numbers to round out the example?

Diversification. VC most likely will be more risky or volatile and return of it won't be similar to S&P500. Main idea is to mix different asset classes - S&P500, VC, hedge funds, bonds and etc, to get smooth results during good and bad times.

> Why would anyone put money in such a fund?

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."

s/"play any lottery"/"founding a startup"/g

The 50% return is just an input to the model, an assumption.

There aren't that many billion dollar VCs out there. By volume most funds are far smaller, so management fees are less and carry is really dependent on gross multiples you deliver to LPs.

spot on, known colloquially as the "two and twenty"

At Kleiner we know from the Pao case that junior partners make $400k while senior partners make $3 million. That's before carry. Carry is about 20% of the returns of the fund, which is divided between (senior) partners of the particular fund --- a VC firm has multiple funds and depending on the firm not every partner may be a partner in each fund.

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.

Kleiner is a huge fund though. Most smaller funds have partners that make a lot less. If you're an engineer, you're making more than I am as a newish VC :)

Yeah, I assume newish VCs have it tougher than most as expenses are high and management fees won't cover the full costs of operating the business. Well, you're entrepreneurs working at a higher level of abstraction after all.

How can fund returns be highly guarded secrets? At least the IRS must have some statistics? I suppose the firms themselves aren't traded, and so don't have to disclose information to anyone other than their customers.

Does the fund only makes returns on liquidity events?

I believe carry is only paid when capital is returned to investors (anything else doesn't make sense). Besides a (portfolio company) liquidity event I think the only other typical time capital is returned is possibly at the maturation of the fund. I guess in theory you might have a portfolio company paying dividends or other unusual situations, I don't know how those are handled.

Sometimes there are cash distributions before the fund closes. I've seen these after big exits, but they usually come later in the fund.

Maybe I wasn't clear: Cash is returned on liquidity events, potentially at maturity (but maybe the fund rolls over positions or delivers stock) and maybe some other rare cases.

What you probably want is median - averages are skewed by outliers.

Probably not very much (as low as a risk-adjusted average of 0% [^]). As usual, you're probably better off sticking your money in the broader stock market.

[^] https://server1.tepper.cmu.edu/seminars/docs/VCSDF_2.pdf

It's an outlier [0] driven business. Median may be more important than mean. E&Y has some great data on VCs in general. [0]

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-...

I think you're misunderstanding how fees & carry works. The carry is not paid out until the fund returns its investment, much later, so its $2M in your example isn't paid out until years down the line. The only way that the firm can pay salaries etc. is from the management fees.

I was oversimplifying, since firms with multiple funds are doing a mix of investing and harvesting at any given time. What you say is more precise - it's more accurate to view the 2/20 as base salary and bonus, especially since the former is much more predictable.

In general, I have seen a range of about 20-30% in long term.

Your question isn't very clear. Do you mean, what is the average salary of a VC? How much is their profit share?

I am curious about their entire personal wealth creation in general as an investor.

You don't usually start as a VC, but you get richer by other means, then, when you're a millionaire you just throw money at startups until one of them hits big or you run out of money

Edit: this is for an Angel Investor, SeoxyS explained better the concept of general VCs

I can't remember the source, but I feel like I've heard it a few times, that VC overall is a fairly poorly performing asset class considering the risk. Most VCs don't beat the market.

This was the finding of the famous Kauffman Institute report on their own 20+ years experience as an LP in various funds.

PDF copy here: http://www.kauffman.org/~/media/kauffman_org/research%20repo...

I know a VC who makes $400k in base salary. FYI on that side

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