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If the system of incentives enables bad VCs to make a lot of money, then the system is broken by virtue of the existence of these bad VCs.
by rjurney 17y ago
If the system of incentives enables bad VCs to make a lot of money, then the system is broken by virtue of the existence of these bad VCs.
- staunch 17y agoThe quantity of bad VCs seems like evidenced it's broken. If 5% were bad, that'd be one thing. My perception is that it's more like 80%+ are "bad".
- abossy 17y agoGreg McAdoo stated at Startup School 2008 that of the 400+ VC firms in Silicon Valley, only 15 are profitable (3.75%). http://omnisio.com/startupschool08/greg-mcadoo-partner-at-sequoia-capital-talks-at-startup-school-08 http://omnisio.com/startupschool08/greg-mcadoo-partner-at-se...
- rjurney 17y agoIf true, that is totally outrageous.
- pg 17y agoYes, that's true. But that doesn't mean there is something wrong with the fee structure. Most of the money-losing firms would still have lost money even if they charged zero fees. The real problem is simply that most VCs are lousy investors. But it's not uncommon for most practitioners in a field to be bad at it. Most artists are bad, for example. The point where the VC business is broken is where LPs meet GPs. Credulous LPs give money to incompetent GPs. It's not the VC model that's broken, but the LPs' judgement. Most LPs shouldn't be investing in VC. They do it in imitation of LPs past who've made lots of money that way, like big university endowments and certain family funds, but they don't know what they're doing, choose badly, and end up losing their money. A lot of them will probably pull back now, which will mean a lot of the worst performing VCs will disappear. Which is exactly what Fred has been saying. The problem is not the VC model per se, but inexperienced LPs' undiscriminating appetite for VC funds. (Yet again, the macroexpansion problem. http://news.ycombinator.com/item?id=685713 http://news.ycombinator.com/item?id=685713)
- staunch 17y agoThe current fee structure allows bad VCs to survive. Just because it works in the ideal case doesn't mean it's not a bug in the system. Wouldn't it be an improvement if the industry standard fee structure only rewarded profitability?
- netsp 17y agoI think at this point it's semantics. 'What do you mean broken?' I would classify your above comment as an explanation of how & why the model is problematic. I actually do agree that it's not the fee structure that's necessarily the problem. There's no reason that VCs should take 100% of the risk together with their investors.
- pg 17y agoIt's not accurate to describe that situation by saying the model is broken, because by that standard every investment model is broken. The bad VCs are simply tricking their LPs by selling them bad investments. That happens with every other form of investment, from land to equity to hedge funds.
- rjurney 17y agoNo more IPOs or (lately) acquisitions, lots of funds failing to return principal, and yet those VCs still making money. Sounds like a broken model to me. Maybe this does point to a broader problem? Isn't this the kind of shenanigans that led to the current downturn?
- pg 17y agoWhat evidence do you have that the current lack of IPOs is due to the fee structure of VCs? All the evidence I know of suggests otherwise. VCs had the same fee structure back when there were lots of IPOs.
- rjurney 17y agoThe lack of IPOs is not due to the fee structure of VCs. The incentive model however, continues to compensate them extremely well even though the LP's profit model is broken by SoX. Which would seem to mean that the system as a whole is broken, and that the VCs incentives are now a problem. This would seem to suggest that these incentives need to be reformed to fix the system. More likely though is that VC will simply crash like housing before any reform happens.
- dpapathanasiou 17y agoYou generalize about every investment model, but can you name vehicles where the '2 and 20' fee structure is standard? It's really only hedge funds and VC funds. But the real problem with the '2 and 20' (especially in a bad economic climate) is that VCs have less incentive to care about how their portfolio actually performs.