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 😉