Comments on: The other problem with venture capital: management fees http://cdixon.org/2009/08/26/the-other-problem-with-venture-capital-management-fees/ Sat, 20 Mar 2010 18:05:10 +0000 http://wordpress.org/?v=2.9.1 hourly 1 By: unforgiven « ginsudo http://cdixon.org/2009/08/26/the-other-problem-with-venture-capital-management-fees/comment-page-1/#comment-1873 unforgiven « ginsudo Tue, 01 Sep 2009 03:51:58 +0000 http://www.cdixon.org/?p=443#comment-1873 [...] 31 Aug 2009 at 20:51 (business) (compensation, venture capital) Apparently Chris Dixon is my new blog crush, a potential successor to worthies such as Pmarca and Steve Blank.  And I’m not alone:  Venture Beat picked up on Chris’s suggestion that the 2-and-20 compensation “rule” in venture capital compensation deserves to be revisited. [...] [...] 31 Aug 2009 at 20:51 (business) (compensation, venture capital) Apparently Chris Dixon is my new blog crush, a potential successor to worthies such as Pmarca and Steve Blank.  And I’m not alone:  Venture Beat picked up on Chris’s suggestion that the 2-and-20 compensation “rule” in venture capital compensation deserves to be revisited. [...]

]]> By: Is it time for the venture capital “two-and-twenty” to end? | Family Learning Center http://cdixon.org/2009/08/26/the-other-problem-with-venture-capital-management-fees/comment-page-1/#comment-1868 Is it time for the venture capital “two-and-twenty” to end? | Family Learning Center Tue, 01 Sep 2009 03:25:09 +0000 http://www.cdixon.org/?p=443#comment-1868 [...] with Flickr co-founder Caterina Fake and made early stage investments at Bessemer Venture Partners, published a provocative post last week asking if it’s time to end the practice: The problem is the management fees.  2% made sense [...] [...] with Flickr co-founder Caterina Fake and made early stage investments at Bessemer Venture Partners, published a provocative post last week asking if it’s time to end the practice: The problem is the management fees.  2% made sense [...]

]]> By: Is it time for the venture capital “two-and-twenty” to end? http://cdixon.org/2009/08/26/the-other-problem-with-venture-capital-management-fees/comment-page-1/#comment-1864 Is it time for the venture capital “two-and-twenty” to end? Tue, 01 Sep 2009 03:09:22 +0000 http://www.cdixon.org/?p=443#comment-1864 [...] with Flickr co-founder Caterina Fake and made early stage investments at Bessemer Venture Partners, published a provocative post last week asking if it’s time to end the practice: The problem is the management fees.  2% made sense [...] [...] with Flickr co-founder Caterina Fake and made early stage investments at Bessemer Venture Partners, published a provocative post last week asking if it’s time to end the practice: The problem is the management fees.  2% made sense [...]

]]> By: Is it time for the venture capital “two-and-twenty” to end? | TechDozer.Com http://cdixon.org/2009/08/26/the-other-problem-with-venture-capital-management-fees/comment-page-1/#comment-1858 Is it time for the venture capital “two-and-twenty” to end? | TechDozer.Com Tue, 01 Sep 2009 02:00:34 +0000 http://www.cdixon.org/?p=443#comment-1858 [...] with Flickr co-founder Caterina Fake and made early stage investments at Bessemer Venture Partners, published a provocative post last week asking if it’s time to end the practice: The problem is the management fees.  2% made sense [...] [...] with Flickr co-founder Caterina Fake and made early stage investments at Bessemer Venture Partners, published a provocative post last week asking if it’s time to end the practice: The problem is the management fees.  2% made sense [...]

]]> By: Is it time for the venture capital “two-and-twenty” to end? | UpOff.com http://cdixon.org/2009/08/26/the-other-problem-with-venture-capital-management-fees/comment-page-1/#comment-1855 Is it time for the venture capital “two-and-twenty” to end? | UpOff.com Tue, 01 Sep 2009 01:15:31 +0000 http://www.cdixon.org/?p=443#comment-1855 [...] with Flickr co-founder Caterina Fake and made early stage investments at Bessemer Venture Partners, published a provocative post last week asking if it’s time to end the practice: The problem is the management fees.  2% made sense [...] [...] with Flickr co-founder Caterina Fake and made early stage investments at Bessemer Venture Partners, published a provocative post last week asking if it’s time to end the practice: The problem is the management fees.  2% made sense [...]

]]> By: Is it time for the venture capital “two-and-twenty” to end? | Newsfed - Aggregate local and tech stories with related videos and tweets! http://cdixon.org/2009/08/26/the-other-problem-with-venture-capital-management-fees/comment-page-1/#comment-1854 Is it time for the venture capital “two-and-twenty” to end? | Newsfed - Aggregate local and tech stories with related videos and tweets! Tue, 01 Sep 2009 01:02:48 +0000 http://www.cdixon.org/?p=443#comment-1854 [...] with Flickr co-founder Caterina Fake and made early stage investments at Bessemer Venture Partners, published a provocative post last week asking if it’s time to end the practice: The problem is the management fees.  2% made sense [...] [...] with Flickr co-founder Caterina Fake and made early stage investments at Bessemer Venture Partners, published a provocative post last week asking if it’s time to end the practice: The problem is the management fees.  2% made sense [...]

]]> By: Is it time for the venture capital “two-and-twenty” to end? | Stoth http://cdixon.org/2009/08/26/the-other-problem-with-venture-capital-management-fees/comment-page-1/#comment-1852 Is it time for the venture capital “two-and-twenty” to end? | Stoth Tue, 01 Sep 2009 00:47:13 +0000 http://www.cdixon.org/?p=443#comment-1852 [...] with Flickr co-founder Caterina Fake and made early stage investments at Bessemer Venture Partners, published a provocative post last week asking if it’s time to end the practice: The problem is the management fees.  2% made sense [...] [...] with Flickr co-founder Caterina Fake and made early stage investments at Bessemer Venture Partners, published a provocative post last week asking if it’s time to end the practice: The problem is the management fees.  2% made sense [...]

]]> By: Elie Seidman http://cdixon.org/2009/08/26/the-other-problem-with-venture-capital-management-fees/comment-page-1/#comment-1791 Elie Seidman Sun, 30 Aug 2009 19:29:21 +0000 http://www.cdixon.org/?p=443#comment-1791 Completely agree - it takes a uniquely ambitious (or greedy?) person to get out of bed in the morning and take the right kind of risks when they are already making $1M/yr. It actually creates some very odd risk/reward curves. Take too much risk and you blow up the fund that gives you $1M/yr basically no matter what. Take too little risk and you only make $1M/yr which is not as rich as your other finance friends so maybe it's best to swing for lots of homeruns instead? The way this all manifests for the entrepreneurs that take the capital from those large funds is that - should those funds have control of the entrepreneurs company - the financial interests of the VC and entrepreneur might diverge massively. The VC has a huge high water mark (the amount of capital they raised from their LPs) that they need to surmount before their carry dollars start to kick in and so they push (or if they control the company, they command) their portfolio companies to "go for broke". In so doing they are likely to start to ask the management team do to things that the mgmt team has no real desire to do and worse, perhaps they are pushing the company well beyond what is natural achievable in that opportunity. 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. Completely agree – it takes a uniquely ambitious (or greedy?) person to get out of bed in the morning and take the right kind of risks when they are already making $1M/yr. It actually creates some very odd risk/reward curves. Take too much risk and you blow up the fund that gives you $1M/yr basically no matter what. Take too little risk and you only make $1M/yr which is not as rich as your other finance friends so maybe it’s best to swing for lots of homeruns instead? The way this all manifests for the entrepreneurs that take the capital from those large funds is that – should those funds have control of the entrepreneurs company – the financial interests of the VC and entrepreneur might diverge massively. The VC has a huge high water mark (the amount of capital they raised from their LPs) that they need to surmount before their carry dollars start to kick in and so they push (or if they control the company, they command) their portfolio companies to “go for broke”. In so doing they are likely to start to ask the management team do to things that the mgmt team has no real desire to do and worse, perhaps they are pushing the company well beyond what is natural achievable in that opportunity.

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.

]]> By: Aaron Cohen http://cdixon.org/2009/08/26/the-other-problem-with-venture-capital-management-fees/comment-page-1/#comment-1682 Aaron Cohen Fri, 28 Aug 2009 16:33:46 +0000 http://www.cdixon.org/?p=443#comment-1682 Chris, meant to get back to you on this. I don't know Hemant so that's great to hear. But you and I have built some companies (and been through a lot) so we get a different level of access. The 30-year old entrepreneur is much better equipped and trained than I was when I was 30. But they are also facing a savage exit environment that was bad before the recession. Quick name 5 exits in the past 3 years that matter? It's not that easy. And the recession only started a year ago. 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 Chris, meant to get back to you on this. I don’t know Hemant so that’s great to hear. But you and I have built some companies (and been through a lot) so we get a different level of access. The 30-year old entrepreneur is much better equipped and trained than I was when I was 30. But they are also facing a savage exit environment that was bad before the recession. Quick name 5 exits in the past 3 years that matter? It’s not that easy. And the recession only started a year ago.

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

]]> By: startupbug.com http://cdixon.org/2009/08/26/the-other-problem-with-venture-capital-management-fees/comment-page-1/#comment-1660 startupbug.com Fri, 28 Aug 2009 10:17:53 +0000 http://www.cdixon.org/?p=443#comment-1660 <strong>The other problem with venture capital: management fees...</strong> 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... The other problem with venture capital: management fees…

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…

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