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The value added by the VCs is the amount of money the venture capital fund makes above and beyond what one would make from investing the same amount of money, o
by donaldc 17y ago
The value added by the VCs is the amount of money the venture capital fund makes above and beyond what one would make from investing the same amount of money, over the same time period, in something low/no risk like, say, U.S. Treasury bonds. If a venture fund does poorly, the value added may be negative.
VC's should get a significant percentage of their value added. But 2% of the principle per year works out, over a ten-year period, to a good 20% of the principle, risk free. That sort of guaranteed return is sure to attract all the wrong sorts of people to be VCs.
- netsp 17y agoThe protection against that should be consumer choice.
- donaldc 17y agoIn theory, yes. And in the great-great-grandparent of this comment, I'm essentially saying that I feel that the days are numbered for the 2% per year management fee. But equilibrium often takes some time to re-establish itself. After a situation changes, customs take time to catch up with the new reality. At the moment, it looks like the common practice of VC fees is lagging behind where it will wind up. Also, I think part of the problem is that the people making the decisions (the "consumers" of VC value-added, i.e. large endowments, pension funds, banks, etc.) generally also have no skin in the game. This means they have much less incentive to press for the absolute best deal they can get, common practice be damned, than they would were they investing their own money into these VC funds. This means that the change in common practice will take longer than it would were the consumers generally investing their own money.