Venture Capital

Why if You are a VC You Should be Insanely Rich

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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
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