Venture Firm Managing Partner Economics

Recently I was talking with an entrepreneur about his goals and aspirations. He offered up something I don’t hear too often: once he sells his company he wants to become a venture capitalist. We dug into it more, especially the economics, and analyzed how it might work out.

Here’s an example scenario of a venture firm with a $100 million fund and three managing partners:

  • 2% management fee and 20% carry (profits) such that the firm has $2 million/year to operate for the first 5-7 years and then a much smaller amount after that
  • $400,000/year salary for each partner and another $800,000/year for associates, office space, legal, accounting, etc.
  • Fund goal to produce 3x cash on cash in seven years, so invest $100 million and generate $300 million from those investments net of management fees (say $10 million)
  • Each partner gets 6% carry with the remaining 2% going to associates, venture partners, advisors, etc.
  • With $300 million from exits, less the initial capital invested ($100 million), the firm gets 20% of the remaining $200 million, which is $40 million. The partners would then each earn $12 million (6% out of the 20%).

So, assuming the fund does well and everyone is happy, the VC earns $12 million over seven years plus a couple million more in salary. The money starts to get much larger when the VCs raise subsequent funds that are larger in size and/or land a once-in-a-generation investment like Google or Facebook.

The economics of a managing partner at a venture firm are straightforward, if not well understood by people outside the industry. As for the entrepreneur in the conversation, he’d make for a great VC.

What else? What are some other thoughts on the economics of a partner at a venture firm?

2 thoughts on “Venture Firm Managing Partner Economics

  1. You left out a hurdle rate for the fund. If the LPs insist on an 8% hurdle (not uncommon), the individual VC’s take drops from $12M to $9M, or slightly over $1M/year. (To a handwaving level of accuracy.) Still better than a poke in the eye with a sharp stick, but noticeably lower.

  2. Never been a VC and perhaps I will be corrected (would love that because I want to know) but I believe of the factors that needs to go into this calculus is that managing partners of venture funds often, if not always, have to participate in the fund. For first time VCs this can take place from writing a check from a successful exit and taking out a loan that they payback via their salary and share of the carry. If you have a successful Fund I then part of those proceeds are rolled into Fund II.

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