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January 26, 2007
The "Get Rich Slow" VC Business
Jeff Bussgang puts a fine point on something that goes largely unsaid at most venture firms: Many current partners have never received a carry check. (Carry is the proportion of a VC firm's investing profits that goes to the partnership. In theory, it should be much more of a motivator than salary.)"I've been in the venture business over 10 years and still haven't received a carry check," complained a VC buddy to me the other day. I was so stunned by this comment that I decided to conduct an informal survey and discovered that many of the 30 and 40 something VCs who have been in the business 6-10 years find themselves in a similar predicament. Now I admit that a VC whining about lack of carry may sound tiresome to an entrepreneur, but it's a phenomenon worthy of some consideration nonetheless, as how VCs get paid underline their motivation - and has been a driver for much of the VC personnel movement in the last few years.Yup, no question that's true, and it's definitely leading to a salary-centric business where firms with the largest management fees are better able to buy talent, purely on salary. It's leading to seven-figure comp schemes, virtually none of which is variable with VC firm performance -- which is bad, of course.
Now, this doesn't make a no-carry VC any more sympathetic. After all, it's hard to feel badly for people earning seven-figure incomes, even if it's not coming from performance. But LPs should care. They should worry about the surprisingly large number of firms where partners continue to get rich, despite the absense of carry checks. It's all internal economics, of course, but it's also a serious misalignment of interests.
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Paul,
It further reinforces my conviction that the VC model is fundamentally broken. You have said that the VC business is a bubble business, in a somewhat different context. I think you meant that all the returns occur during bubbles. Take that thought a little further, and ask why do bubbles happen. Are they spontaneous occurrences of a free market, when people go momentarily insane? Even if that were true in the sense of explaining the *origin* of bubbles (much like the butterfly flapping effect in explaining the weather), VC returns depend crucially on the *size* of bubbles, which is directly determined by the credit/monetary policy of the Fed. If you recall, as early as 1996, Greenspan was perfectly aware of the Irrational Exuberance, yet he only ended up feeding it further and further leading to bubbles and bursts (East Asian bubble in 1997, Russian bubble in 1998, Nasdaq in 1999) with each bubble's burst leading to more monetary accommodation, with the housing bubble created by the need to fight the bursting of the Nasdaq bubble, which was the primary one the VCs benefited from.
During the housing bubble, it was easy to make 6 and 7 figure incomes in the mortgage broking business - that was the exact equivalent of the VCs (conduits for easy credit to flow), though I don't believe the mortgage brokers took themselves as seriously as the VCs routinely do, perhaps because they were aware of their transience.
I could not help but connect this thread with something Jason Ball, a UK VC has wondered about recently - namely why are all young people keen on PE rather than VC...
http://www.jasonball.com/techbytes/2007/01/where_are_the_v.html
that's fascinating. It also aligns with the phenomenon happening on the optionee side of the equation. Outside of a few notable exceptions, anyone with less than a founder's stake at a (successfully exited) venture backed startup is looking at options bringing nothing more than a nice bonus for four years of ass-busting work. In theory the options should be much more of a motivator than salary.