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Honest question, as I've never really understood the industry: where does this money come from and why? And where does the money go that acquisitions and IPOs e

Honest question, as I've never really understood the industry: where does this money come from and why? And where does the money go that acquisitions and IPOs earn them?

ganeumann 13y ago
It comes from large investors: often university endowments or public pension funds. These groups are called the "Limited Partners", or "LPs". It's usually a small percentage of those investors' overall investment portfolio. When there is an exit--a sale of stock--most of the money goes back to these LPs. The money is (more or less) split like this: the LPs get their investment back first then, of the gain, 80% goes to the LPs and the rest goes to the company managing the venture fund to split up as it pleases (this last 20% is called the "carry".)
- namenotrequired 13y ago
  Thanks a lot!
streblo 13y ago
VC's are typically raising money for their funds from even larger funds -- ie hedge funds, private equity firms, endowments, pensions, etc. Any funds with a lot of capital that are looking to diversify. These larger funds become LP's (http://en.wikipedia.org/wiki/Limited_partnership http://en.wikipedia.org/wiki/Limited_partnership) and generate a return typically at the end of some time period -- something like 5 years. So any money from acquisitions/IPOs etc will be returned at that point.
- namenotrequired 13y ago
  Thanks, these replies are very helpful!
zt 13y ago
Venture funds are "General Partners" that manage a pool of capital on behalf of "Limited Partners" or LPs. Limited partners in a fund this size are usually pension funds (CalPERS), university and not-for-profit endowments (Harvard, Brown, MacArthur Foundation), and maybe high-net-worth individuals. So A16Z raises commitments of 1.5B from all of these people who have a lot of money that they want to grow. Those people deploy their capital to VC, to Hedge/PE funds, to timber, to public markets, to bonds, etc. A16Z aren't actually given a pile of cash though, instead A16Z does capital calls on an as-needed basis. Then A16Z deploys that capital to startups and other companies over the life of the fund (often ten years with some extensions). Most venture funds operate on something like a "two and twenty model" meaning that every year they get 2% of the funds value for operating expenses. In A16Z they have a huge staff of designers, recruiters, BD experts, etc, that help their startups. The 2% goes toward things like that. The 20% is carry, which is earned as a percentage of net income. So let's say that A16Z invests 5M in a company on a 10M pre-money valuation. A16Z owns 1/3 of the company. The company sells for $30M the next day to Facebook. A16Z now has $10M dollars. They take $2M of that for themselves and then they distribute back to the LPs the other $8M. (This is lacking a lot of nuance like side funds, but I hope it's helpful).
- namenotrequired 13y ago
  Thanks a lot for responding to me again Zac, helpful as always! (Edit: I realised you usually go by Zac rather than Zach :)
- barber5 13y ago
  It's worth saying that at a number of firms that 2% goes into the pockets of the partners. One thing to like about a16z (full disclosure, I worked there over the summer), imho, is that by using this fee to scale their organization to help portfolio companies, they are far less out of alignment with LPs than most firms who have success with a smaller fund and go on to raise a larger one. The old algorithm of do ok with a small fund, raise a huge one and live off the management fee is under threat -- 5x or die.
- napoleond 13y ago
  The 20% is carry, which is earned as a percentage of net income. So let's say that A16Z invests 5M in a company on a 10M pre-money valuation. A16Z owns 1/3 of the company. The company sells for $30M the next day to Facebook. A16Z now has $10M dollars. They take $2M of that for themselves and then they distribute back to the LPs the other $8M. I'm pretty sure carry is profit (http://en.wikipedia.org/wiki/Carried_interest http://en.wikipedia.org/wiki/Carried_interest), so in your example A16Z would pocket $1M, not $2M (because the $5M A16Z invested needs to be repaid to the LPs first, and then A16Z gets 20% of the remaining $5M). Please correct me if I've misunderstood.

Honest question, as I've never really understood the industry: where does this money come from and why? And where does the money go that acquisitions and IPOs earn them?

ganeumann 13y ago

It comes from large investors: often university endowments or public pension funds. These groups are called the "Limited Partners", or "LPs". It's usually a small percentage of those investors' overall investment portfolio. When there is an exit--a sale of stock--most of the money goes back to these LPs. The money is (more or less) split like this: the LPs get their investment back first then, of the gain, 80% goes to the LPs and the rest goes to the company managing the venture fund to split up as it pleases (this last 20% is called the "carry".)

namenotrequired 13y ago
Thanks a lot!

streblo 13y ago

VC's are typically raising money for their funds from even larger funds -- ie hedge funds, private equity firms, endowments, pensions, etc. Any funds with a lot of capital that are looking to diversify. These larger funds become LP's (http://en.wikipedia.org/wiki/Limited_partnership http://en.wikipedia.org/wiki/Limited_partnership) and generate a return typically at the end of some time period -- something like 5 years. So any money from acquisitions/IPOs etc will be returned at that point.

namenotrequired 13y ago
Thanks, these replies are very helpful!

zt 13y ago

Venture funds are "General Partners" that manage a pool of capital on behalf of "Limited Partners" or LPs. Limited partners in a fund this size are usually pension funds (CalPERS), university and not-for-profit endowments (Harvard, Brown, MacArthur Foundation), and maybe high-net-worth individuals. So A16Z raises commitments of 1.5B from all of these people who have a lot of money that they want to grow. Those people deploy their capital to VC, to Hedge/PE funds, to timber, to public markets, to bonds, etc. A16Z aren't actually given a pile of cash though, instead A16Z does capital calls on an as-needed basis. Then A16Z deploys that capital to startups and other companies over the life of the fund (often ten years with some extensions). Most venture funds operate on something like a "two and twenty model" meaning that every year they get 2% of the funds value for operating expenses. In A16Z they have a huge staff of designers, recruiters, BD experts, etc, that help their startups. The 2% goes toward things like that. The 20% is carry, which is earned as a percentage of net income. So let's say that A16Z invests 5M in a company on a 10M pre-money valuation. A16Z owns 1/3 of the company. The company sells for $30M the next day to Facebook. A16Z now has $10M dollars. They take $2M of that for themselves and then they distribute back to the LPs the other $8M. (This is lacking a lot of nuance like side funds, but I hope it's helpful).

namenotrequired 13y ago
Thanks a lot for responding to me again Zac, helpful as always! (Edit: I realised you usually go by Zac rather than Zach :)
barber5 13y ago
It's worth saying that at a number of firms that 2% goes into the pockets of the partners. One thing to like about a16z (full disclosure, I worked there over the summer), imho, is that by using this fee to scale their organization to help portfolio companies, they are far less out of alignment with LPs than most firms who have success with a smaller fund and go on to raise a larger one. The old algorithm of do ok with a small fund, raise a huge one and live off the management fee is under threat -- 5x or die.
napoleond 13y ago
The 20% is carry, which is earned as a percentage of net income. So let's say that A16Z invests 5M in a company on a 10M pre-money valuation. A16Z owns 1/3 of the company. The company sells for $30M the next day to Facebook. A16Z now has $10M dollars. They take $2M of that for themselves and then they distribute back to the LPs the other $8M. I'm pretty sure carry is profit (http://en.wikipedia.org/wiki/Carried_interest http://en.wikipedia.org/wiki/Carried_interest), so in your example A16Z would pocket $1M, not $2M (because the $5M A16Z invested needs to be repaid to the LPs first, and then A16Z gets 20% of the remaining $5M). Please correct me if I've misunderstood.