Do you have to be rich to join a VC firm as a VC?

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JASON LEMKIN

No, you do not.

It may even be a negative to be rich when you join.

First, you do have to invest a lot of your own money to be a true partner into the fund. But it’s OK. It’s not quite as big of a deal as it sounds.

When you join a VC firm as a partner, you do have to make a large “capital contribution” to the fund, likely of millions of dollars in a large fund — spread out over 10+ years.

But, usually, one way or another, if it’s a well-established fund, you can fund that contribution via specialized loans, or from your salary (fees), or other ways. Your true out-of-pocket here often isn’t that big in established funds.

And often, the senior partners will cover your “capital commitment” in part for you (often, as part of keeping some of the gains in funds where they are no longer all that active).

No one is going to ask you to go broke to join an established, sizeable venture firm. No one. Period.

Now in small funds, you can easily get upside down in the short term — often this “capital contribution” can exceed your salary and fees, and you can go negative or close to it. My current salary at SaaStr Fund is effectively $0 on a net basis, and my capital contribution was pretty large, relatively speaking.

But in large funds, you’ll take out more than you put in. It works itself out.

Second, being truly rich can disalign interests.

If you are too rich, the returns from VC may not be good enough or worth the time. And VC isn’t >that< fun. It’s a lot of work to be a true general partner.

Imagine a $100m fund that does 2x with 4 partners each with 20% interest in the carry, or “gains” (the other 20% is spread among others).

That $100m fund does 2x net, or grows into $200m. But over 10 years. 2x isn’t amazing. But it is better than most funds. It is Top 25% results.

The partners all keep 20% of the gains, or $20m in total ($100m gains x 20%). Each partner has a 20% stake in that 20%, or $4m each ($20m x 20% to each partner) paid out later, over 10+ years. Once and if those liquidity events finally come.

Over 10+ years, that’s $400k per year per partner in annualized gains on a 2x $100m fund, which is decent results on a not-tiny fund.

If you are truly rich, is it worth the hassle for $400k a year + your salary? No. And even that $400k has to wait until you have IPOs and acquisitions. It may never even come.

For this reason, some LPs (the folks that give VCs money to invest) get a little nervous about general partners that are too rich. They know they may check out.

Yes, big funds can make a lot more money than my math above. And also, if you raise say 3 funds over 9 years … that math triples (and the timeline lengthens).

But even just one fund takes time. 10+ years. Of endless meetings. Of LP pitches. Of board meeting after board meeting after board meeting.

You can scale up the math and see Really Rich People may not see the full appeal in venture.

So VC is a very, very good job. And pretty darn cushy (although stressful — you are judged every single day on your results).

But being a super-successful founder?

Much harder. But much better.

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Published on February 2, 2017
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