Adonis Diaries

Getting rich or Crazy rich? Venture Capitalists money making “methods”. And compensated on the front end, No loss in any case.

Posted on: June 25, 2022

The “Carry”? The percentage of the winnings that the partners take before distributing the profits to their investors.

Layering factor: The big firms raise a new fund every two to four years, yet funds typically charge these fees over five years. That means the more successful firms are simultaneously collecting management fees on two or three funds,

Gary Rivlin

May 29, 2019

Today’s Venture Capitalists (VCs) are so well compensated that the only question is whether they end up rich or crazy rich

Photo: Douglas Sacha/Getty Images

AsAs careers go, venture capital can seem an enviable one.

Like Hollywood casting directors, VCs spend part of most days dressed casually, sitting around a conference table and sipping bottled water, auditioning entrepreneurs one hour at a time.

VCs boast that even when they’re meeting with companies they don’t end up funding, they get to spend their entire days meeting with intelligent, engaging people with unique ideas about the future.

The money is a big draw.

In theory, VCs are like the entrepreneurs they back: They grow rich only if enough of the companies in which they invest flourish.

In reality, today’s venture capitalists are so well compensated on the front end that the only question is whether they end up rich or crazy rich.

The key to a VC’s wealth is the “carry”: The percentage of the winnings that the partners take before distributing the profits to their investors.

20% of the Carry is standard, but some top firms take a 25% or 30% share.

So for every $100 million generated in profits, the partners take a $20 million to $30 million cut before distributing the rest among their investors.

A successful VC for a top-tier firm can expect to earn somewhere between $10 million and $20 million a year. The very best make even more.

Meanwhile, there’s also the “management fee” of 2% or 2.5% that venture capital firms charge their investors. In the case of a billion-dollar fund, that works out to another $20 million to $25 million.

There’s also what might be called the layering factor: The big firms raise a new fund every two to four years, yet funds typically charge these fees over five years. That means the more successful firms are simultaneously collecting management fees on two or three funds, plus their shares of the carries.

At top firms, the lowest associate slogging through the slush piles of pitches and poring over the financials of would-be portfolio companies pulls down somewhere between $120,000 and $150,000 a year.

A promotion to junior VC — a principal at some companies, a “venture partner” at others — translates into an annual salary closer to $500,000, along with a nibble of the carry.

The general partners at the more established firms make an annual salary of $1 million or more, but that’s only a fraction of the money they hope to pocket.

A partner at a top Valley firm told me that he and his partners paid themselves $3 million apiece every year.

Surprised by a figure that high, I blurted out, “But I thought most of your money is from the carry?”

“It is,” he said, offering a shrug and an apologetic smile.

On the condition that I not name him or his firm, he walked me through the math.

At his shop, they take a 30% cut before distributing profits. “The aim on an early-stage fund is 5x,” he said: $5 billion on a $1 billion fund, or $4 billion in profits. (Late-growth VCs hope for something closer to a threefold return.) In that scenario, he and his half-dozen or so partners will split $1.2 billion (30% of the profits) over the life of that one fund.

A successful VC for a top-tier firm can expect to earn somewhere between $10 million and $20 million a year. The very best make even more.

Most everyone who has attained any kind of success in Silicon Valley seems to dream of becoming a venture capitalist.

“I have the same experience over and over,” said Scott Dettmer, a Palo Alto-based attorney who in 1995 cofounded Gunderson Dettmer, a law firm that caters to fast-growth tech startups.

“A founder sells his company, he takes a few months off, and then he’s asking for an appointment to visit. And that’s when he tells me he wants to be a venture capitalist.” 

The wider world might venerate the entrepreneur, but for many successful entrepreneurs, the dream is life as a working venture capitalist.

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