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Ask HN: How much money does an average VC make?

106 points by srameshc 11y ago

How much money does an average VC make ? And how much does the top VCs make and how much personal wealth do they accumulate over their tenure as a VC.

ingend88 11y ago
In general, I have seen a range of about 20-30% in long term.
charlesdm 11y ago
Your question isn't very clear. Do you mean, what is the average salary of a VC? How much is their profit share?
- srameshc 11y ago
  I am curious about their entire personal wealth creation in general as an investor.
  - raverbashing 11y ago
    You don't usually start as a VC, but you get richer by other means, then, when you're a millionaire you just throw money at startups until one of them hits big or you run out of money Edit: this is for an Angel Investor, SeoxyS explained better the concept of general VCs
siliconc0w 11y ago
What you probably want is median - averages are skewed by outliers.
SeoxyS 11y ago
VCs raise large funds from institutional investors (pensions funds, university endowments, etc.) called Limited Partners (LP). Typically, the VC (also known as General Partner, GP) contributes 1-5% of the fund out of their own pocket, with the rest coming from the LPs. VCs are paid in two ways: 1) Management fees. 2%/year of funds under management is common. (Over the ~10yr life of a fund, that's ~20% of the capital.) 2) Carried interest. This is a share of the profits on the fund before the money is returned to investors. The typical number here is 20%. So, let's imagine a fictional $1B fund. Here's how the numbers might work out. Y-0: Fund is raised. VC contributes $10M for 1% of the fund. Y-0: 2% management fees are used to cover expenses / pay VCs. Y-1~2: Fund invests in stuff, takes additional 2% management fees every year. Y-2~9: Fund is depleted for new investments. Continues to take 2% management fees every year. Y-10: Fund's last investments exit. Overall, the fund returns a 50% profit ($1.5B, with $500M in profit). VCs take $15M for their original contribution, and an additional $100M in carried interest. So far, they've also taken $200M in management fees (2% a year for 10 years). Total profit: $305M.
- ryandrake 11y ago
  So, overall a 2950% return over ten years. I know its a contrived example, but not too shabby if you're lucky enough to be in the club. Wish this scaled down. I'd gladly invest $1,000 today for $30,500 in ten years.
  - sandstrom 11y ago
    This doesn't hold for all of them. As a group VCs, underperform many other asset classes. I think the well known firms tend to earn LPs good money, but aggregated it's bleaker. So although money-losing VCs still earn management fees (until they close down), earnings are lower than the example. https://hbr.org/2014/08/venture-capitalists-get-paid-well-to-lose-money https://hbr.org/2014/08/venture-capitalists-get-paid-well-to...
  - tomp 11y ago
    The fees (management and performance) shouldn't be considered as "return on investment", but rather as "paycheck for work performed". The founded might as well invest $0 (e.g. if s/he has rich friends or a reputation that makes it easy for him/her to find seed capital), but still reap a lot of profits.
    - e12e 11y ago
      Agreed. On the other hand, is it really 100 times more work to manage an investment of 10 M than one of 100k? 1000 times more work to manage 1 bn than 1 m?
      - tomp 11y ago
        No, but pay isn't based on how hard the work is. It's based on the value provided, and/or on the influence the individual has; and somebody able to attract 1bn is much more influential than someone with just 1m under management.
        carrotleads 11y ago
foobarqux 11y ago
At Kleiner we know from the Pao case that junior partners make $400k while senior partners make $3 million. That's before carry. Carry is about 20% of the returns of the fund, which is divided between (senior) partners of the particular fund --- a VC firm has multiple funds and depending on the firm not every partner may be a partner in each fund. I guess you could ball park 5 partners per fund and therefore 4% carry per partner but that's probably not accurate because the carry distribution likely rewards partners in proportion to the success of the companies that they sourced or on whose boards they sit. Also you want to give a little bit to associates and junior partners. Carry is not guaranteed but if the returns are positive you will get something (and 20% of a middling 5% return is still a lot of money on a billion dollar fund.) In any case carry is valuable in VC because they are like free call options on very volatile assets and option value increases with volatility. It's difficult to calculate how much VCs are getting from carry because fund returns are closely guarded secrets. All this said it's pretty tough to break-in to top VC firms.
- sparkzilla 11y ago
  Does the fund only makes returns on liquidity events?
  - foobarqux 11y ago
    I believe carry is only paid when capital is returned to investors (anything else doesn't make sense). Besides a (portfolio company) liquidity event I think the only other typical time capital is returned is possibly at the maturation of the fund. I guess in theory you might have a portfolio company paying dividends or other unusual situations, I don't know how those are handled.
    - cdibona 11y ago
      Sometimes there are cash distributions before the fund closes. I've seen these after big exits, but they usually come later in the fund.
      - 11y ago
gburt 11y ago
Probably not very much (as low as a risk-adjusted average of 0% [^]). As usual, you're probably better off sticking your money in the broader stock market. [^] https://server1.tepper.cmu.edu/seminars/docs/VCSDF_2.pdf https://server1.tepper.cmu.edu/seminars/docs/VCSDF_2.pdf
rcarrigan87 11y ago
I can't remember the source, but I feel like I've heard it a few times, that VC overall is a fairly poorly performing asset class considering the risk. Most VCs don't beat the market.
- matthewmcg 11y ago
  This was the finding of the famous Kauffman Institute report on their own 20+ years experience as an LP in various funds. PDF copy here: http://www.kauffman.org/~/media/kauffman_org/research%20reports%20and%20covers/2012/05/we%20have%20met%20the%20enemy%20and%20he%20is%20us(1).pdf http://www.kauffman.org/~/media/kauffman_org/research%20repo...
HashThis 11y ago
I know a VC who makes $400k in base salary. FYI on that side
mathattack 11y ago
It's an outlier [0] driven business. Median may be more important than mean. E&Y has some great data on VCs in general. [0] Quick math... "In 2013, 153 early-stage funds in the US raised US$9.4 billion" Going with the mean (even though median is better) suggests the average fund is ~$60 million. Let's say that a firm runs 2 concurrently. 2013 was a boom year, so let's say the last fund was $40. So it's 100mm under management. They keep 2% of funds under management, and get 20% carry. Let's say that the funds appreciate 10% a year (we're talking mean - it may actually be lower). That means 2% of 100m = $2mm in management fees and 20% of 20% of 10% of 100m = $2mm in carry. (I'm ignoring compounding, but let's let that slide) The firm has $4mm to pay rent, fancy trips, business dinners and nice salaries. If the firm invests the $100mm in 20 deals, perhaps it needs 5 partners (4 boards per partner?) and 5 associates. Let's call the fixed overhead a half million dollars? That leaves $3.5 million - perhaps each partner takes home $500K and each associate $200K? Or $600K per partner and $100K per associate? My informal intuition is that the top partners do much better, while most folks do a little worse. We're also in a boom time now because great investments are being harvested, and lots of money is entering the sector. Net - they're doing good in both carry and management fees. This may sound a lot, but generally the private equity folks earn more. [0] http://www.forbes.com/profile/john-doerr/ http://www.forbes.com/profile/john-doerr/ [1] http://www.ey.com/Publication/vwLUAssets/EY-venture-capital-insights-2013-year-end/$FILE/EY-venture-capital-insights-2013-year-end.pdf http://www.ey.com/Publication/vwLUAssets/EY-venture-capital-...
- SeoxyS 11y ago
  I think you're misunderstanding how fees & carry works. The carry is not paid out until the fund returns its investment, much later, so its $2M in your example isn't paid out until years down the line. The only way that the firm can pay salaries etc. is from the management fees.
  - mathattack 11y ago
    I was oversimplifying, since firms with multiple funds are doing a mix of investing and harvesting at any given time. What you say is more precise - it's more accurate to view the 2/20 as base salary and bonus, especially since the former is much more predictable.

106 points by srameshc 11y ago

How much money does an average VC make ? And how much does the top VCs make and how much personal wealth do they accumulate over their tenure as a VC.

ingend88 11y ago

In general, I have seen a range of about 20-30% in long term.

charlesdm 11y ago

Your question isn't very clear. Do you mean, what is the average salary of a VC? How much is their profit share?

srameshc 11y ago
I am curious about their entire personal wealth creation in general as an investor.
- raverbashing 11y ago
  You don't usually start as a VC, but you get richer by other means, then, when you're a millionaire you just throw money at startups until one of them hits big or you run out of money Edit: this is for an Angel Investor, SeoxyS explained better the concept of general VCs

siliconc0w 11y ago

What you probably want is median - averages are skewed by outliers.

SeoxyS 11y ago

VCs raise large funds from institutional investors (pensions funds, university endowments, etc.) called Limited Partners (LP). Typically, the VC (also known as General Partner, GP) contributes 1-5% of the fund out of their own pocket, with the rest coming from the LPs. VCs are paid in two ways: 1) Management fees. 2%/year of funds under management is common. (Over the ~10yr life of a fund, that's ~20% of the capital.) 2) Carried interest. This is a share of the profits on the fund before the money is returned to investors. The typical number here is 20%. So, let's imagine a fictional $1B fund. Here's how the numbers might work out. Y-0: Fund is raised. VC contributes $10M for 1% of the fund. Y-0: 2% management fees are used to cover expenses / pay VCs. Y-1~2: Fund invests in stuff, takes additional 2% management fees every year. Y-2~9: Fund is depleted for new investments. Continues to take 2% management fees every year. Y-10: Fund's last investments exit. Overall, the fund returns a 50% profit ($1.5B, with $500M in profit). VCs take $15M for their original contribution, and an additional $100M in carried interest. So far, they've also taken $200M in management fees (2% a year for 10 years). Total profit: $305M.

ryandrake 11y ago
So, overall a 2950% return over ten years. I know its a contrived example, but not too shabby if you're lucky enough to be in the club. Wish this scaled down. I'd gladly invest $1,000 today for $30,500 in ten years.
- sandstrom 11y ago
  This doesn't hold for all of them. As a group VCs, underperform many other asset classes. I think the well known firms tend to earn LPs good money, but aggregated it's bleaker. So although money-losing VCs still earn management fees (until they close down), earnings are lower than the example. https://hbr.org/2014/08/venture-capitalists-get-paid-well-to-lose-money https://hbr.org/2014/08/venture-capitalists-get-paid-well-to...
- tomp 11y ago
  The fees (management and performance) shouldn't be considered as "return on investment", but rather as "paycheck for work performed". The founded might as well invest $0 (e.g. if s/he has rich friends or a reputation that makes it easy for him/her to find seed capital), but still reap a lot of profits.
  - e12e 11y ago
    Agreed. On the other hand, is it really 100 times more work to manage an investment of 10 M than one of 100k? 1000 times more work to manage 1 bn than 1 m?
    - tomp 11y ago
      No, but pay isn't based on how hard the work is. It's based on the value provided, and/or on the influence the individual has; and somebody able to attract 1bn is much more influential than someone with just 1m under management.
      - carrotleads 11y ago

foobarqux 11y ago

At Kleiner we know from the Pao case that junior partners make $400k while senior partners make $3 million. That's before carry. Carry is about 20% of the returns of the fund, which is divided between (senior) partners of the particular fund --- a VC firm has multiple funds and depending on the firm not every partner may be a partner in each fund. I guess you could ball park 5 partners per fund and therefore 4% carry per partner but that's probably not accurate because the carry distribution likely rewards partners in proportion to the success of the companies that they sourced or on whose boards they sit. Also you want to give a little bit to associates and junior partners. Carry is not guaranteed but if the returns are positive you will get something (and 20% of a middling 5% return is still a lot of money on a billion dollar fund.) In any case carry is valuable in VC because they are like free call options on very volatile assets and option value increases with volatility. It's difficult to calculate how much VCs are getting from carry because fund returns are closely guarded secrets. All this said it's pretty tough to break-in to top VC firms.

sparkzilla 11y ago
Does the fund only makes returns on liquidity events?
- foobarqux 11y ago
  I believe carry is only paid when capital is returned to investors (anything else doesn't make sense). Besides a (portfolio company) liquidity event I think the only other typical time capital is returned is possibly at the maturation of the fund. I guess in theory you might have a portfolio company paying dividends or other unusual situations, I don't know how those are handled.
  - cdibona 11y ago
    Sometimes there are cash distributions before the fund closes. I've seen these after big exits, but they usually come later in the fund.
    - 11y ago

gburt 11y ago

Probably not very much (as low as a risk-adjusted average of 0% [^]). As usual, you're probably better off sticking your money in the broader stock market. [^] https://server1.tepper.cmu.edu/seminars/docs/VCSDF_2.pdf https://server1.tepper.cmu.edu/seminars/docs/VCSDF_2.pdf

rcarrigan87 11y ago

I can't remember the source, but I feel like I've heard it a few times, that VC overall is a fairly poorly performing asset class considering the risk. Most VCs don't beat the market.

matthewmcg 11y ago
This was the finding of the famous Kauffman Institute report on their own 20+ years experience as an LP in various funds. PDF copy here: http://www.kauffman.org/~/media/kauffman_org/research%20reports%20and%20covers/2012/05/we%20have%20met%20the%20enemy%20and%20he%20is%20us(1).pdf http://www.kauffman.org/~/media/kauffman_org/research%20repo...

HashThis 11y ago

I know a VC who makes $400k in base salary. FYI on that side

mathattack 11y ago

It's an outlier [0] driven business. Median may be more important than mean. E&Y has some great data on VCs in general. [0] Quick math... "In 2013, 153 early-stage funds in the US raised US$9.4 billion" Going with the mean (even though median is better) suggests the average fund is ~$60 million. Let's say that a firm runs 2 concurrently. 2013 was a boom year, so let's say the last fund was $40. So it's 100mm under management. They keep 2% of funds under management, and get 20% carry. Let's say that the funds appreciate 10% a year (we're talking mean - it may actually be lower). That means 2% of 100m = $2mm in management fees and 20% of 20% of 10% of 100m = $2mm in carry. (I'm ignoring compounding, but let's let that slide) The firm has $4mm to pay rent, fancy trips, business dinners and nice salaries. If the firm invests the $100mm in 20 deals, perhaps it needs 5 partners (4 boards per partner?) and 5 associates. Let's call the fixed overhead a half million dollars? That leaves $3.5 million - perhaps each partner takes home $500K and each associate $200K? Or $600K per partner and $100K per associate? My informal intuition is that the top partners do much better, while most folks do a little worse. We're also in a boom time now because great investments are being harvested, and lots of money is entering the sector. Net - they're doing good in both carry and management fees. This may sound a lot, but generally the private equity folks earn more. [0] http://www.forbes.com/profile/john-doerr/ http://www.forbes.com/profile/john-doerr/ [1] http://www.ey.com/Publication/vwLUAssets/EY-venture-capital-insights-2013-year-end/$FILE/EY-venture-capital-insights-2013-year-end.pdf http://www.ey.com/Publication/vwLUAssets/EY-venture-capital-...

SeoxyS 11y ago
I think you're misunderstanding how fees & carry works. The carry is not paid out until the fund returns its investment, much later, so its $2M in your example isn't paid out until years down the line. The only way that the firm can pay salaries etc. is from the management fees.
- mathattack 11y ago
  I was oversimplifying, since firms with multiple funds are doing a mix of investing and harvesting at any given time. What you say is more precise - it's more accurate to view the 2/20 as base salary and bonus, especially since the former is much more predictable.