Venture Capital

Why if You are a VC You Should be Insanely Rich'

Jason Lemkin

Ok – First, I know some folks are going to challenge this math, but I think it’s basically correct. Second, being a VC is hard.  Not always 100 hours-a-week hard work, but hard to do well. But — investing in someone else’s hard work is obviously far easier than founding and inventing something yourself.

With that, let me explain why VCs should be insanely rich:

  • As a founder, if you raise venture capital, you probably will end up owning 10-19% of your company by the time you have a liquidity event, depending on dilution, timing, # founders, etc.  Let’s call it 12.5% on average for a founder at a liquidity event.  Less at IPO.

What about VCs?  What do they effectively own, as individuals?  A lot more than you think:

  • Let’s say you are a VC that does A/B rounds and buys 20% ownership (I know, I know, it can be harder these days to get 20%).
  • Then, the VC firms typically themselves keep 20-30% of the gains (their own investors get the rest) on each investment, once they’ve paid back their own investors.  Let’s call it just 20%.  So 20% of the gains on 20% ownership = 4% of the gains on each investment.
  • Now, in each venture fund, a VC typically invests in 8-10 deals per VC.  (More per firm, per 8-10 or so per partner).  So 8 deals x 4% personal effective ownership in each = 32%.  10 deals x 4% = 40%.
  • So, founders end up with say 12.5% of just one company.  VCs end up with a semi-diversified portfolio of 8-10 great companies and own the equivalent of 32%-40% on a one company equivalent basis.
  • And actually, it can get even better than that, because in the time it takes a founder to achieve a liquidity event, VCs can raise multiple funds sometimes.  Also, some firms let them personally invest extra in their best deals, and double down.

So VCs get 2.5-4x the equivalent ownership stake of a founder, with very few of the operating hassles — and they get to pick.  As a founder, you do get to pick, sort of.  But only one gig at a time – not 8. I know this oversimplifies things.  It ignores basis, and many other nuances.  And picking is hard.  But inventing something from nothing is harder. So my point is : VCs should be insanely rich 😉

Published on September 27, 2012
  • Many of them are!

    BTW, don’t forget the management fees. I know of one case where a VC was taking home $4 million a year from the management fees alone whether or not their portfolio did anything. Management fees together with the portfolio effect deliver that, “Heads I win, Tails you lose” return.

    OTOH, probably the right way to figure out their situation is to go back to your 3x return on fund number, look at fund size, and look at partner share of the fund. If they raise a $500M fund, get 3x so it is $1.5B, and have a 20% carry, they have $300M to split between the partners from each fund they raise. Figure they raise a new fund every 4-5 years, carry the one, dot the i, cross the t, and…

    Yep, they should be insanely rich, Black Swan Farming is a happy pursuit!

    Makes you wonder why more firms don’t give up half to charity like Andreesen Horowitz…

  • Agreed but not trying to really discuss compensation per se … they can do whatever they want with management fees, more power to them.

    I think the “equivalent ownership” math is the less obvious piece and more interesting. If VCs pick well — which is hard — they should be insanely rich simply off their equity stakes. Because they actually own more equity than founders individually, with a more diverse base.

    I don’t think that’s bad, just interesting.

  • Nicolas

    “If VCs pick well”, VCs will end up with 50% of their investment that goes bust, 30% that doesn’t make any money, and 20% that really perform (less than 10% if they don’t “pick well”) That’s why VCs are not insanely rich, they end up having 4% of one, two companies top, that are doing well, which is less than a successful entrepreneur.
    Partner level position also usually required to have made some good money in previous jobs, so VCs have some money but they are not insanely rich.

  • Not challenging the industry math … but … my real point is there’s “no excuse” for it. At least as an exercise … By that I mean, entrepreneurs have to bat 1.000 to make it — and they have to start something from zero, from scratch. VCs have the “leisure” to wait and choose post-inception, so it should be “easier” to be a VC than a founder, and more lucrative, in theory.

    But for sure the reality of the 20% vs. 100% means VCs aren’t mostly insanely rich. But if they had to pick as well as founders, I think they would be 😉

  • Pingback: The Best of SaaStr: Our Top 100 Posts, Organized by Topic (Sales, Marketing, Customer Success, etc.) | saastr()

  • Fred Krueger

    The math is correct but the conclusion is erroneous. What you have proved is that the average VC should make more than the average VC-funded entrepreneur. I think this is correct. But both *on average* make less than what you might otherwise expect, due to the high percentage of failure. The VC has the “advantage” of lower standard deviation — but the entrepreneur gets some of this diversification serially.

    • Jason Lemkin

      Yes consider it really a thought exercise. But if VCs picked really well, they could make a lot more than the average SaaS founder (not the Zucks of the world). In the real world, they generally don’t, and this math doesn’t pan out for most VCs as much as it could in theory.

  • I totally agree. Collect 2% on the fund no matter whether you do good or bad. After 10 years, if you did bad, who cares? You already made your millions from the LPs. You don’t need to create anything. You don’t need to hustle. Just decide who you think will be a winner. AWESOME!


Share This