Venture Capital general partners are just playing the game by the current set of rules. The conventional compensation model for VC firms (as well as for Private Equity firms and hedge funds) which is 2% of assets under management per year and 20% of pr…

On a related note, it may well also be that these large funds are one of the causes behind the perception that many people have that it’s a meaningful event for a startup to raise capital. Startups often get a lot of – positive – press for raising a big financing round and people talk about it as if it were something important that was achieved. But liquidation preferences effectively insure that that raised money comes out first; raising VC money only means that you have taken on money that is dilutive (you can’t ever pay it back) and that comes out of the deal before your own money does. While raising outside equity is often value accretive (though always percentage dilutive), the celebration of capital raises is a mistake and needs to be understood for what it is – selling a piece of your company (and perhaps control of the decision making) that you can never get back.

We have many challenges in our ecosystem that need to be addressed. I really want to hang out with you because your platform is gaining traction and can be vital alongside Fred’s and Paul Graham’s and Gurley’s

Aaron

The fact that most VCs get rich via “management fees” just by showing up every day. For those who don’t know, most VC’s get paid by so-called 2 and 20. The 2 refers to the 2% of the fund they use to cover operating expenses and pay their salar…

I wrote about this last month as well – http://www.socialstartups.com/2009/07/20/vc-future/

So I think the market will correct in the long term (but buyer beware in the short term!).

Steven Kane has been screaming this from the rooftops here in Boston and I couldn’t agree more.

Amen.
;dc

It makes no sense to me that someone investing in 2 scientists with an idea should have the same fee structure as KKR.

You’re spot on! Bravo for speaking out on this problem. This is a huge problem in the VC/Start Up world.
Interesting how VC”s don’t want to pay “market wages” for start up employees, yet, the VC wages are completely out of whack.
Clearly, the interests are NOT aligned. There are so many hurdles for start up founders and employees and the VC have a “do anything I want” pass.

Bottom line is VC’s should take a salary, but, the upside should come from being good investors. Getting rich of management fees from teachers pensions is pathetic and wrong.

you can definitely earn a nice living on 2%, and i dont doubt that there is often lots of money left over, but i wouldnt want to work (or invest) with any vc who wants to put more money to work in an individual deal (where it is not necessary) or do less deals.

hedge funds, etc, all have a management fee and a carry.

the management fee is supposed to be enough just to keep the lights on.

But @Rob, of course excessive fees impact entrepreneurs as much anybody.

To wit, if fees are at 2% per annum of committed capital, then 16%-20% of the fund goes to fees. LPs should scream bloody murder — that’s QUITE a load! But entrepreneurs are de facto compelled to try to provide venture returns on $1 when they are only given about $0.80 to work with.

The situation is actually even worse — many many funds charge more than 2% (2.5% nearly became the norm last few vintages). Worse, ALL funds require portfolio companies to pay for legal and due diligence costs associated with investments — in my (admittedly rough) calculation, legal and 3rd party due diligence adds up to about 0.5% (50 basis points) of the entire fund, over the life of the fund.

I’d actually love to see a business model for a VC firm, but I think they differ wildly depending on scale and location.