How Venture Capitalists Make Money
Today’s VCs are so well compensated that the only question is whether they end up rich or crazy rich
As careers go, venture capital can seem an enviable one. Like Hollywood casting directors, VCs spend part of most days dressed casually, sitting around a conference table and sipping bottled water, auditioning entrepreneurs one hour at a time. VCs boast that even when they’re meeting with companies they don’t end up funding, they get to spend their entire days meeting with intelligent, engaging people with unique ideas about the future.
But of course, the money is a big draw. In theory, VCs are like the entrepreneurs they back: They grow rich only if enough of the companies in which they invest flourish. In reality, today’s venture capitalists are so well compensated on the front end that the only question is whether they end up rich or crazy rich.
The key to a VC’s wealth is the “carry”: The percentage of the winnings that the partners take before distributing the profits to their investors. Twenty percent is standard, but some top firms take a 25% or 30% share. So for every $100 million generated in profits, the partners take a $20 million to $30 million cut before distributing the rest among their investors.
A successful VC for a top-tier firm can expect to earn somewhere between $10 million and $20 million a year. The very best make even more.
Meanwhile, there’s also the “management fee” of 2% or 2.5% that venture capital firms charge their investors. In the case of a billion-dollar fund, that works out to another $20 million to $25 million.
There’s also what might be called the layering factor: The big firms raise a new fund every two to four years, yet funds typically charge these fees over five years. That means the more successful firms are simultaneously collecting management fees on two or three funds, plus their shares of the carries.
At top firms, the lowest associate slogging through the slush piles of pitches and poring over the financials of would-be portfolio companies pulls down somewhere between $120,000 and $150,000 a year. A promotion to…