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> BTW Aswath Damodaran once made a very astute point regarding VCs: they're traders, not investors, looking to enter low and exit high. Period. Notwithstanding

> BTW Aswath Damodaran once made a very astute point regarding VCs: they're traders, not investors, looking to enter low and exit high. Period. Notwithstanding the fact that investors look to buy low and sell high too, the point here is incorrect. Venture capitalists, like many in financial services, are not really traders or investors. Sure, they might trade and/or invest, but their primary function is to raise capital that they can siphon fees from. A 2% annual fee on committed capital on a $500 million fund that has an expected life of at least 10 years will produce $100 million or more in fees for a venture capital firm over its lifetime. Add a new, larger fund every few years (assuming you don't blow an earlier fund up) and you can see that the 20% carry, while potentially very significant, is really just icing on the cake. Anybody who really wants to succeed as a venture capitalist should understand this. Incidentally, when you recognize that the limited partner side of the equation is more important than the startup side of the equation, it's not surprising that venture capital has a herd mentality and there are few true cowboys making bold bets. There is little to no incentive to stray too far from the pack.

m52go 11y ago
The comment he made was with regard to the mentality they have when determining whether to deploy capital, not so much the legal and financial structure of their deals. You can see the full context here, worded better originally than I could hope to paraphrase: http://bubbleinvestment.com/qa-with-aswath-damodaran-nyu-professor-valuation-virtuoso/ http://bubbleinvestment.com/qa-with-aswath-damodaran-nyu-pro...
- 7Figures2Commas 11y ago
  You seem to be missing the point: venture capitalists raise money to generate fees. How you classify what they do with the money left over after fees isn't all that important because the primary business is fee generation.
  - m52go 11y ago
    > How you classify what they do with the money left over after fees isn't all that important because the primary business is fee generation. Right. But the 'what they do with the money left over after fees' happens to be the subject of this discussion. You're arguing a moot point.
mandateofheaven 11y ago
20% of 30%+ IRR returns (which is representative of the top quartile) is more substantial than a 2% management fee
- 7Figures2Commas 11y ago
  There's a saying in private equity: you can't eat IRR. Venture capital funds aren't the worst products in financial services, but if they're as wonderful as you seem to be suggesting, why is it that there are lots of firms that haven't received a carry check in years and most VCs don't invest any money of real note in their own funds[1]? Is it possible you're overestimating? [1] https://hbr.org/2014/08/venture-capitalists-get-paid-well-to-lose-money https://hbr.org/2014/08/venture-capitalists-get-paid-well-to...

m52go 11y ago

The comment he made was with regard to the mentality they have when determining whether to deploy capital, not so much the legal and financial structure of their deals. You can see the full context here, worded better originally than I could hope to paraphrase: http://bubbleinvestment.com/qa-with-aswath-damodaran-nyu-professor-valuation-virtuoso/ http://bubbleinvestment.com/qa-with-aswath-damodaran-nyu-pro...

7Figures2Commas 11y ago
You seem to be missing the point: venture capitalists raise money to generate fees. How you classify what they do with the money left over after fees isn't all that important because the primary business is fee generation.
- m52go 11y ago
  > How you classify what they do with the money left over after fees isn't all that important because the primary business is fee generation. Right. But the 'what they do with the money left over after fees' happens to be the subject of this discussion. You're arguing a moot point.

mandateofheaven 11y ago

20% of 30%+ IRR returns (which is representative of the top quartile) is more substantial than a 2% management fee

7Figures2Commas 11y ago
There's a saying in private equity: you can't eat IRR. Venture capital funds aren't the worst products in financial services, but if they're as wonderful as you seem to be suggesting, why is it that there are lots of firms that haven't received a carry check in years and most VCs don't invest any money of real note in their own funds[1]? Is it possible you're overestimating? [1] https://hbr.org/2014/08/venture-capitalists-get-paid-well-to-lose-money https://hbr.org/2014/08/venture-capitalists-get-paid-well-to...