It can be harder than you might think.
The further you are along in your career, the easier it is to have the time, networks and personal capital to be an investor. No question.
And it can take a decade or more to make any real money from investing. It’s hard to have a way to do that, for most of us, at 21. We just don’t have the resources, the background, or the network.
So one might think 45 or so is sort of the perfect age to start. Imagine you’d built a successful company or two, still had tons of energy but enough zen and experience to prefer to help others at the next stage.
That all makes sense. 45 is a great time to transition to helping the next generation, if you were fortunate enough to have success earlier than that. Maybe the best time of all for that transition.
The “problem” though is the length of venture capital funds:
- VC funds these days last 12–14 years. It used to be 10, but with companies waiting longer to IPO, funds often last a dozen or more years.
- You really need to commit to being a partner in 3 funds. This is what the Limited Partners (the ones that invest in VC funds) expect. And it’s also probably what it takes to get good at it.
- So, 12 years per fund, with a 3 year gap between each fundraise … equals an 18–20+ year commitment.
Do you want to make a 20 year commitment to investing at 45?
First, are you sure you still want to do it at 65? Let’s assume you are. But really … many folks aren’t that committed all the way to 65. It’s a competitive job. Technology changes a lot over two decades. Are you really committed to keeping up? To going to every demo day for the next 20 years? For begging 20 year old founders to let you into hot deals … when you are 60?
But assuming you are OK committing to 65 … now imagine at 45 you are a successful founder and made say $25m in your start-ups. A lot!
Now, you invest for 20 years, a total of 3 funds of $150m each with 3 partners. So that’s $450m invested. And assume the funds in total do 2x net of fees (top 25% performance). So the funds make $900m+ gross returns (not easy) and a $450m profit (after the $450m invested). 20% of that profit generally goes to the partners. That’s $90m to the partners. Which at first, sounds like a lot.
But … it’s split at least 3 ways, with some also to non-partners. So assume each partner makes $25m. But remember, that’s over 20 years. So that’s $1.25m a year over 20 years (with a lot of that backloaded). Yes, a lot. But not that much compared to the $25m you made from your successful start-ups. And it takes … 20 years! And … you probably aren’t the CEO anymore, if it isn’t your fund.
If you have no success yet, that $1.25m could indeed be incredible. But if you made 10x-20x or more than that already … is it worth it? Especially all the headaches, the dramas, the VC politics, and all that?
So 45 can be a great time to start, the perfect time to start.
But also a tough time to start.