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Geshwiler's mistaken. The more progressive VCs are happy to deals of half a million or less. Even the stodgiest are interested in deals under 2 million. A pa

by pg 18y ago

Geshwiler's mistaken. The more progressive VCs are happy to deals of half a million or less. Even the stodgiest are interested in deals under 2 million. A partner at a famous firm was recently telling me about one of their favorite portfolio companies. Their initial investment was $300k. He was not bummed about that; he was delighted. What "moves the needle" for a fund is the ultimate value of the shares they buy, not how much they cost. That only moves the needle of the fuel gauge.

staunch 18y ago
I was under the impression that VCs only get paid their management fee on the portion of their fund they've got in play. I thought that was the explanation for why they still like to invest a lot of money in each company. Doesn't that come into play, at least for the lower tier VCs, who probably won't do well on actual returns?
- skmurphy 18y ago
  They get a management fee based on the total size of the fund, not just those that have been invested. It's typically between 2 and 3% of the fund per year and in addition to 20% of the profits made, if any, from investments.
  - staunch 18y ago
    That's the part I was unclear on. So if they take a billion dollar fund they're earning $20 million/year even if they've only invested $50 million of it so far?
    - skmurphy 18y ago
      Yes, and for a top tier firm it's closer to $30 million. It's a perverse incentive for increasing the size of the fund, which in turn increases the minimum investment: number of deals is a function of partner bandwidth, deal size is fund size divided by number of deals (you have to allow for follow on investments so it's the total amount invested over all rounds).
- pg 18y ago
  VCs make money two ways: management fees, and a cut of the returns. The best VCs expect to make most of their money on the returns. Yes, the bad VCs are mostly interested in management fees. But we avoid those. So YC-funded companies rarely encounter them. Actually the distaste is somewhat mutual: the lamer VCs prefer to invest in companies founded by suits. Not sure exactly why. Could be because they're all about looking good on paper. Or it could be just because the VCs are suits themselves.

by pg 18y ago

staunch 18y ago

I was under the impression that VCs only get paid their management fee on the portion of their fund they've got in play. I thought that was the explanation for why they still like to invest a lot of money in each company. Doesn't that come into play, at least for the lower tier VCs, who probably won't do well on actual returns?

skmurphy 18y ago
They get a management fee based on the total size of the fund, not just those that have been invested. It's typically between 2 and 3% of the fund per year and in addition to 20% of the profits made, if any, from investments.
- staunch 18y ago
  That's the part I was unclear on. So if they take a billion dollar fund they're earning $20 million/year even if they've only invested $50 million of it so far?
  - skmurphy 18y ago
    Yes, and for a top tier firm it's closer to $30 million. It's a perverse incentive for increasing the size of the fund, which in turn increases the minimum investment: number of deals is a function of partner bandwidth, deal size is fund size divided by number of deals (you have to allow for follow on investments so it's the total amount invested over all rounds).
pg 18y ago
VCs make money two ways: management fees, and a cut of the returns. The best VCs expect to make most of their money on the returns. Yes, the bad VCs are mostly interested in management fees. But we avoid those. So YC-funded companies rarely encounter them. Actually the distaste is somewhat mutual: the lamer VCs prefer to invest in companies founded by suits. Not sure exactly why. Could be because they're all about looking good on paper. Or it could be just because the VCs are suits themselves.