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?