I think it was just foreshadowing.
Until recently, it was tough to leave a venture firm if it, and you, were successful:
- “Carry” (or the profits from the investments) vests over 10 years (although the vesting is front-loaded in some firms).
- And it would often take 2–3 funds before a partner’s carry percentage was even close to equal. I.e., it might take 5–10 years to get enough carry in a fund to even matter.
- Switching to another fund was rarely a much better deal. Your vesting would often start from scratch, the cash comp wouldn’t be much better, and there’d be another set of old guard running the shop. And you might be leaving just about the time you start to get your firm carry checks.
- And finally, it was very tough and rare to raise your own fund. LPs (the folks that invest in VC firms and give them the money to invest) were conservative and reluctant to stake new firms. I was told, for example, by both a very top LP and a very top GP that I would never be able to raise my own fund.
The combination of all three meant a partnership was also a golden handcuff. No matter how challenging the situation, no matter how unfair some of the economics … it was better to stay together. Your vesting would span decades, your cash comp would slowly increase, and the economics of jumping to another firm weren’t necessarily dramatically better.
While partners in the past were willing to leave some carry and economics behind to join new firms, the bull run of the past 10 years, and in particular, the past 5–6 years re-mixxed incentive structures:
- 500+ new firms were formed in the past 5–6 years as LPs wanted to deploy more capital into venture, and importantly, came to the conclusion that new, differentiated firms were often the past way to achieve top returns.
- Generational change has created lots of opportunities for successful GPs to jump from one top fund to another, and trade off some carry for much better economics and control. The last generation, one way or another, has retired or is retiring from many top firms.
- Everyone’s feeling brilliant. Even if you are leaving a lot of carry behind, if you’re already in 2–3 unicorns, you start to feel confident you can find another 2–3, or even, 4–10. You might be leaving millions behind in theory (that might not come for 8–10 years down the road), but if you can just do it all over again for more carry — why not?
- It’s OK. It’s OK to leave now. It’s OK to set up your own firm. These were seen as negatives even just a few years ago by many LPs. Not anymore.
So if you have a hot-enough hand, and can raise your own fund or join someone else’s fund with much better economics … it can make sense to leave a little carry behind, and strike out on your own.
This has been true in hedge funds for a long time. It just took a 10+ year bull run to come to venture.
This likely will slow down when times are a little less golden and rosy.
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