Understanding how Venture Capital compensation works is akin to deciphering a complex puzzle, with various pieces including salaries, bonuses, carried interest, and attached terms. Factors like seniority, location, firm size, and market cycles play crucial roles. While the allure of VC as a career path is undeniable, with its promise of engaging with cutting-edge technologies, the potential for substantial financial rewards varies highly. Is pursuing a career in Venture Capital solely for the monetary gain advisable, or are there other, more fulfilling reasons to venture into this field?
In this article and its companion webinar, I shed light on the multifaceted nature of VC compensation, breaking down the mechanisms through which VC funds generate income for their managers. I dissect the various components that make up a Venture Capitalist’s earnings, from the famed 2/20 rule to the key terms and conditions that influence compensation, such as GP commit, hurdle rate, vesting, and the dynamics of the proceeds waterfall.
In This Post
- How VC Funds Make Money
- Strings Attached To Venture Capital Compensation
- Venture Capital Compensation Packages
- Is Venture Capital Compensation Enough To Validate The VC Career Choice?
- Conclusion: Do Venture Capital For The Job, Not The Money
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How VC Funds Make Money
This section describes the economic foundations of Venture Capital funds, starting with the LP/GP structure and expanding to the famous “2/20” compensation mechanism in vogue in private equity.
Foundations of VC Economics: The LP/GP Structure and the 2/20 Rule
Most VC funds follow the Limited Partner (LP)/General Partner (GP) model, a cornerstone shaping how VC funds operate and profit. LPs are the investors who provide the capital for the fund, while GPs are the Venture Capitalists who manage the investments. Read the article below if you’re unfamiliar with this model and want to grasp the implications for VC firms’ deployment strategy.
The “2/20 rule” is an industry-standard compensation structure where GPs receive a 2% management fee on the total assets under management (AUM) and a 20% carried interest (or “carry”) on the profits generated by the fund beyond a specified return threshold. This framework aligns the interests of GPs and LPs, incentivizing GPs to maximize the fund’s performance.
While the 2/20 structure is widely regarded as the standard in Venture Capital compensation, there’s significant variability based on fund size, strategy, and negotiation dynamics.
Emerging managers, keen on aligning their interests with the long-term success of their investments, may opt for a structure emphasizing carried interest over management fees. This entrepreneurial approach incentivizes the creation of substantial value.
Smaller funds might levy higher management fees, sometimes deviating from the traditional 2% to adequately cover operational expenses, given their smaller asset base.
Lead Investors, particularly those looking to bring co-Investors into deals, might negotiate a 1/10 structure. This arrangement may improve a deal’s economics as they will charge co-Investors 1% management fee and 10% carried.
These variations underscore the flexibility within VC fund structures, tailored to balance the fund’s operational needs with the incentive to drive significant returns. Further details on the management fees and carry follow.
Management Fees: The Engine of VC Operations
Management fees serve as the operational backbone for VC funds, covering the day-to-day expenses and allowing GPs to scout, invest in, and support promising startups. Typically set at around 2% of the fund’s AUM, these fees ensure that the fund’s management operations are financially sustainable, regardless of the fund’s investment success.
Basic Venture Capital Compensation Is Based On Management Fees
Management fees are collected by the operating company responsible for the fund’s management. They are debited from the capital calls, usually every quarter, to cover substantial costs such as:
- Salaries and Compensation: Human capital is a significant expense, as VC salaries are substantial. The fund’s talent commands high compensation for their expertise and skills.
- Operational Infrastructure: This includes the costs associated with physical office space (real estate) and the technology required to evaluate and monitor investments.
- Professional Services: Accounting and auditing services are necessary for the fund’s financial integrity and compliance with regulations.
- Annual Gatherings: Funds typically host an annual meeting for LPs to report on performance, strategy, and portfolio company updates.
However, it is noteworthy that not all expenses are covered by the management fee. For instance, the portfolio companies typically bear travel expenses to board meetings, and the fund may absorb certain fundraising expenses at the point of its closing.
Committed vs. Invested
Management fees in Venture Capital can be structured based on committed or invested capital, each with its own implications. When fees are based on committed capital, the fund charges fees on the total amount pledged by LPs, regardless of whether that capital is currently invested in portfolio companies. This method ensures a predictable revenue stream for the fund’s operations but can be a point of contention for LPs when a large portion of their commitment is not yet deployed.
On the other hand, fees based on invested capital are charged only on the portion of LPs’ commitments that have been deployed into investments. It aligns the GP’s revenue more closely with the fund’s activity level, potentially incentivizing more informed investment decisions. However, it can also lead to a less stable operational budget for the fund, especially in the early years when it is not fully invested.
If management fees are calculated on invested capital, then LPs are fine beging patient and respecting the discipline of the manager.
Hunter Sommerville – Stepstone (Source: 20VC)
A potential misalignment emerges when VC markets slow down. GPs accumulate substantial undeployed capital (“dry powder”), which raises questions about their ability to efficiently call and invest this capital, especially in a challenging market.
In such environments, VC firms shouldn’t rush to deploy their current fund’s capital to return to the market for more fundraising. However, concerns arise regarding how long these firms can justifiably “sit” on uninvested capital.
This is where the fee structure becomes critical. Hunter Sommerville, a partner at secondary buyer Stepstone, recently made the case that if management fees are based on invested capital, LPs may be more willing to be patient and respect the fund managers’ discipline in not hastily deploying capital. But if fees are on committed capital, the situation could become problematic, as LPs pay fees on idle money.
I disagree with Hunter’s position.
Basing the fee structure on invested capital may incentivize Venture Capitalists to deploy capital more aggressively. Since their management fee earnings are tied to the amount of capital put to work, GPs could be motivated to invest more rapidly, potentially compromising the due diligence process or investing in less-than-ideal opportunities.
This could lead to a misalignment of interests, where the focus shifts from seeking quality investments that promise long-term growth to prioritizing the quantity of investments to secure management fees. It’s an argument for careful consideration, as it underscores the delicate balance between incentivizing GPs and ensuring disciplined investment strategies that protect the long-term interests of the LPs.
Carried Interest: The Reward for Successful Investments
Carried interest or “carry,” typically representing 20% of the fund’s capital gains, is a critical part of the Venture Capital compensation package and the primary source of potential wealth for Venture Capitalists.
This performance-based compensation rewards GPs for generating returns that exceed the fund’s hurdle rate (see details below), acting as a powerful incentive for GPs to identify and nurture high-growth ventures. The intricacies of carried interest calculations, including catch-up provisions and waterfall structures, directly impact the final compensation GPs receive from successful exits.
Carried Interest Calculation
Let’s take an example assuming the following conditions for the Venture Capital fund:
- Total Committed Capital: $100 million (for simplicity, let’s assume all committed capital is invested)
- Total Exit Proceeds: $300 million
- Carried Interest Rate: 20%
- Hurdle Rate: 8%, cleared (see below)
Here’s the carried interest calculation:
Capital Gains: The gains are the total exit proceeds minus the committed capital. In this case, $300 million – $100 million = $200 million.
Carried Interest: As the gains exceed the hurdle amount, the GP is entitled to a 20% carried interest or 20% of $200 million, which is $40 million.
Two notions matter here. First, proceeds are different from gains. Carry is calculated on how much capital GPs create beyond the LPs’ commitments, not the committed capital. As we’ll see later in this post, management fees impact the money at work, so most GPs will negotiate the possibility of “recycling management fees.”
Second, while most professionals will refer to capital gains as profits, this is incorrect. Capital gains are a balance sheet item, while profits are an income statement item.
Does Venture Capital Compensation Reflect Value-Add?
Carried interest exists as a fundamental component of Venture Capital compensation to align the financial interests of the GPs with the performance of the investments they manage. It serves as a powerful incentive mechanism for several reasons:
Performance Incentive: As mentioned before, carried interest is a reward for the GPs if the fund performs well. Since it is a share of the profits, GPs only receive this compensation after returning the initial capital and, often, after surpassing a predefined hurdle rate. This structure motivates GPs to seek out investments that will yield high returns, as their earnings are directly tied to the success of their portfolio companies.
Superior Deal Sourcing: Venture Capitalists are constantly in pursuit of high-potential startups. Carried interest incentivizes them to use their expertise, networks, and resources to identify and secure the best deals. It rewards the skill involved in deal sourcing—finding those rare investment opportunities that could lead to outsized returns.
Value Addition: Beyond identifying promising deals, Venture Capitalists are expected to actively contribute to their investments’ growth and success. This involves providing strategic guidance, mentoring management, facilitating partnerships and customer relationships, and assisting with additional fundraising. Carried interest recognizes and rewards the substantial value that GPs bring to the table, not just through capital but through these active, value-adding engagements.
Long-Term Commitment: The nature of carried interest, typically realized after several years, encourages a long-term perspective. GPs are incentivized to support and nurture their portfolio companies over time rather than seeking quick exits that may not yield the best outcomes.
Risk Sharing: Since carried interest is contingent on the fund’s success, GPs share the risk with their LPs. They stand to gain only if the LPs gain, which is a fair proposition for both parties. If the investments do not perform, the GPs receive no carried interest, which can be a significant portion of their potential earnings.
Watch the webinar for real-life examples of VC funds’ economic structures.
The Fees vs. Carry Debate: Which One Weighs in More in Venture Capital Compensation?
The balance between Fees (management fees) and Carry (carried interest) is a fundamental debate in VC compensation. Management fees provide immediate, predictable income to manage the fund, whereas carried interest represents potential future profits contingent on the fund’s success.
The debate centers on finding the right balance that fairly compensates GPs for their ongoing management efforts while also incentivizing the long-term success of the fund’s investments.
I first encountered this issue in the mid-2000s, as I was financing large LBOs, and the private equity sponsors I was working with were raising mega funds with billions of dollars of assets under management. The economics did not incentivize GPs to make outsized returns, as they were making dozens of millions of dollars in management fees. This situation prompted large LPS like Calpers to negotiate lower management fees with GPs they invested in.
A Philosophical Question?
As the VC asset class matured in the last two decades and mega funds arrived here, the same issue arose around Venture Capital compensation structures.
Cendana’s Michael Kim recently illustrated the fees vs. carry issue in concrete examples. For example, turning a $50 million fund into a $450 million gain (a 10x return) yields a $90 million carry at a 20% rate. This is comparable to a $500 million fund that doubles in value (a 20% carry would amount to $100 million). While the financial outcome is close, the strategies differ. The choice between pursuing high multiples with smaller funds or achieving more modest ones with larger funds depends on the fund managers’ goals, philosophies, and capabilities.
However, missing the target performance has different implications for each manager. In the first case, management fees would amount to a few million dollars (as indicated below, management fee percentages decrease substantially after the end of the investment period). In the second case, the partners would net $10 million yearly, or $75 million over 10 years, assuming the fee goes down to 1% annually after the investment period.
Even with more partners and staff costs typical for a larger fund, GPs in the second case would make a decent living even without overperformance from their portfolio. The limit, naturally, is to be able to raise the next fund.
Management fee is a loan.
Michael Kim – Cendana Capital (Source: the 10x Capital Podcast)
LPs making allocations to VC funds must ponder the fees vs. carry debate thoughtfully.
Michael Kim likens management fees to non-recourse loans, emphasizing the expectation that these fees must be “repaid” through successful fund performance before carry is realized. This perspective aligns GP and LP interests by prioritizing the return of called capital.
In the podcast, he defends the small fund approach, citing Mucker Capital’s investment in Honey, acquired by PayPal in 2019 for $4 billion. The $12 million fund made $280 million in proceeds from that single investment, resulting in dozens of millions in carried interest. In contrast, the fund’s management fee amounted to a mere $240,000 annually—showcasing how smaller funds can still produce life-changing economic value for fund managers despite lower management fee income.
Management Fees Compound Over Time
It doesn’t mean that small funds should forgo management fees entirely. Emerging managers launching micro funds to build traction hope to gradually raise larger funds. When all goes well, a typical trajectory is to raise a first fund of $5 million, then a second one around $20-25 million, and a third one at $50 million.
In that case, even though the management fee decreases over time as a percentage of total assets, the fees collected by these three funds compound over time. Since the costs of managing what remains small funds do not increase substantially, GPs can make a living if they successfully raise follow-on funds.
To illustrate this point, let’s assume a hypothetical scenario where a manager oversees three funds of increasing size ($5 million, $20 million, and $50 million) and applies the following management fee structure:
- 3% per annum for the first four years
- 2% per annum for years 5-6
- 1% for years 7-10
This declining fee structure would produce a reliable revenue stream, with the total management fees across three funds amounting to approximately $1.5 million by Year 8.
Watch the webinar for detailed calculations.
Strings Attached To Venture Capital Compensation
In this section, I’ll break down some of the most critical components constraining Venture Capital compensation: GP Commit, Hurdle Rate, GP Catch-up, Proceeds Waterfall, and the ongoing debate between Fees and Carry.
GP Commit: The Skin in the Game
The GP Commit refers to the capital GPs must invest in their own funds. This commitment demonstrates the GPs’ confidence in the fund’s prospects and aligns their interests with those of the LPs. The GP Commit typically ranges from 1% to 5% of the total fund size and signifies to the LPs that the GPs have “skin in the game,” as they stand to lose personal capital if the investments do not perform well.
A 2019 report by MJ Hudson showed that 100% of the funds in the study included a GP Commit, with the following ranges and prevalence among the funds surveyed:
Most of the funds surveyed were private equity players, with only 21% operating in VC territory. In Venture Capital, the norm is closer to 1%.
A recent analysis by Recast Capital’s partners challenged the conventional wisdom of a one-size-fits-all approach to the GP Commit in Venture Capital funds. Claiming that the 1% standard stems from outdated tax stipulations, they argued that while most GPs still adhere to this safe harbor to ensure favorable tax treatment on carried interest, the 1% benchmark is arbitrary and potentially exclusionary.
The article argues that the GP Commit should be more flexible, reflecting each manager’s circumstances. This requirement can pose a significant barrier for emerging managers, especially those with smaller funds or without substantial personal wealth. It may discourage talented individuals from diverse backgrounds from entering the field, potentially limiting the diversity of Venture Capitalists and, by extension, the diversity of founders they fund.
The authors advocate for a more nuanced approach that considers the totality of “skin in the game,” including the time, attention, opportunity cost, and reputational risk GPs invest in their funds. They suggest that as GPs grow wealthier over time, it is reasonable to expect an increase in their GP commitment, promoting a more inclusive and progressive path forward.
Hurdle Rate: The Performance Threshold
The Hurdle Rate is a predefined rate of return the fund must achieve before GPs can receive their share of carried interest. This rate is a benchmark that ensures LPs receive a return on their investment before the GPs earn carried interest. It is a tool for LPs to ensure that GPs prioritize generating substantial returns, not just the accumulation of fees.
The hurdle rate can be determined in different ways:
- A compounded rate of return (IRR). While 8% is the norm in private equity, there is more variability in Venture Capital
- A fixed return expressed as a multiple (MOIC). Some LPs will require a 1.5x return before GPs can make their carry
Are Hurdle Rates in VC Outdated?
Despite the promise of high returns that ostensibly come with the high-risk profile of Venture Capital investments, hurdle rates in VC are often lower than those in comparable private market segments like private equity. One study showed that only 15% of VC funds had a hurdle rate, with a median requirement of 6%.
One rationale is that a one-size-fits-all hurdle rate may unfairly penalize VC fund managers. With the average holding period for VC investments increasing, some argue that the hurdle rate structure is outdated, prompting a call for renegotiation of terms—potentially in the form of a variable rate tied to a public market equivalent, a metric I detailed in the article below.
Go Further: Venture Capital Returns: True Lies?
A study by eFront indicates that despite performance improvements, only 38% of U.S. VC funds have exceeded the traditional 8% hurdle rate over two decades, suggesting a misalignment between the time-sensitive hurdle rate calculations and the longer asset development time in VC.
Even the top 25% of funds failed to meet the hurdle rate consistently, pointing to the possibility that the one-size-fits-all hurdle rate may unfairly penalize VC fund managers.
In the webinar, I illustrate how hurdle rates are calculated with concrete examples.
Proceeds Waterfall and The GP Catch-up
When it comes to clearing the hurdle rate, distributions are typically structured so that returns are first allocated to Limited Partners until the hurdle rate is met. This ensures that they receive the minimum agreed-upon return on their investment.
Once this return threshold is crossed, the subsequent distributions may follow a catch-up mechanism where the General Partner receives most of the gains until they have “caught up” with the carried interest percentage they would have obtained had it been applied from the first dollar of capital gains.
After the catch-up, gains are split according to the agreed-upon carried interest ratio, such as 80% to Limited Partners and 20% to the General Partner. This method seeks to prioritize the Limited Partners’ returns while providing a lucrative incentive for the General Partner after successful fund performance.
Watch the webinar for detailed calculations.
Vesting and Clawback’s Impact on Venture Capital Compensation
Vesting schedules are crucial mechanisms designed to align the interests of the VCs with those of their LPs and the long-term success of the portfolio companies.
Vesting in the context of VC compensation refers to the process by which a VC earns their share of carried interest over time or based on achieving certain milestones, rather than receiving it upfront. This approach ensures that VCs remain committed to the fund and its investments over its lifecycle, fostering a focus on long-term value creation rather than short-term gains. There are three types of vesting schedules.
Time-Based Vesting: The most common vesting schedule is time-based, where the VC’s carried interest or equity stakes vest progressively over a period, typically 4 to 5 years, with a 1-year cliff—aligned on the fund’s investment period. This method ensures that VCs have a sustained commitment to the fund’s success and are incentivized to stay with the fund over the crucial early years of investments.
Performance-Based Vesting: Another approach is performance-based vesting, where a portion of the VC’s carried interest vests only if the fund achieved certain predefined performance benchmarks. This could include specific metrics such as Internal Rate of Return (IRR) targets, multiple returns on invested capital (MOIC), Distributions to Paid-In Capital (DPI), or successful exits. Performance-based vesting aligns VCs’ compensation directly with the fund’s success, motivating them to actively work towards maximizing the fund’s returns.
Hybrid Vesting Models: Some funds employ a hybrid model combining time and performance-based vesting elements. For instance, a portion of carried interest might vest over time, while an additional portion vests only upon achieving certain performance milestones. This model balances the need for long-term commitment with the motivation to achieve exceptional results.
Vesting schedules for VCs are similar to those put in place for Founders and employees, with the difference that they apply to carried interest. Read the article below for more details on vesting schedules.
Venture Capital Compensation Packages
In this section, I address each component of Venture Capital compensation (salary, bonus, and carry), the factors impacting them, and the questions VC job candidates should ask during the hiring process.
Salary, Bonus, and Carry by Role, Location, Fund Size, and Firm Type
I was surprised to realize there was so much information on Venture Capital compensation packages now compared to just a few years ago. Many sources now report salary and bonus levels (carry is more confidential).
Watch the webinar for a detailed analysis and levels and the list of sources. One critical consideration is the variability in compensation, which depends on the factors listed below.
Seniority
As is the case in other transaction-based jobs such as M&A and Private Equity, Partners command larger shares of carried interest and higher salaries, reflecting their role in fund management and decision-making.
In certain firms, partners may earn multiples of the salary attributed to junior members, with their bonuses alone potentially surpassing the total annual salary of their junior counterparts. This discrepancy reflects the significant role and influence that partners hold in investment decisions, fund strategy, and overall firm success.
Another point to remember is that titles within VC firms can vary. Unlike investment banking, where roles (analyst, associate, associate director, director or VP, managing director, etc.) are well defined, titles are more loose in Venture Capital.
Some organizations designate all members as Partners in title. However, being a General Partner (GP) carries more weight, as it often implies part-ownership of the management company and a corresponding share in the firm’s profits and carried interest.
Firm Size
Salary levels are significantly influenced by the size of the Assets Under Management (AUM). Generally, larger firms with substantial AUM can afford higher salaries due to the larger management fees they collect. In contrast, smaller firms are “top-heavy“: a few partners and a couple of interns. As the AUM increases, the available pool for salaries and bonuses expands, allowing for more generous compensation packages.
Larger AUMs sometimes require more sophisticated investment strategies, deeper due diligence, and a broader management effort to oversee a more extensive portfolio of companies, justifying higher compensation for the individuals responsible for these tasks. A recent survey showed that VC firms with over $250 million under management paid their employees much more than those below that threshold.
Location
Compensation levels also vary by geography. VCs in major tech hubs like Silicon Valley or New York often receive higher salaries and bonuses due to the higher cost of living and the concentration of high-value funds.
Another study I discussed in the webinar shows salary differences of 30% to 50% between geographies in the US:
- Silicon Valley offers the highest base compensation for Analysts and Senior Associates, with salaries starting at $96,000, reflecting the high cost of living and the concentration of technology-focused VC firms in the area.
- New York competes closely by offering the highest bonuses, with Analysts receiving up to $28,000, leading to the highest median cash compensation in the VC industry at $123,000. This is indicative of New York’s diverse industry focus and competitive finance landscape.
- Los Angeles is noted for providing the highest median cash compensation for Associates at $185,000, highlighting the city’s growing importance as a hub for Venture Capital, particularly in the media, entertainment, and technology sectors.
Similar trends are observed in Europe, where VC principals in the UK make 15% more than Germany and 50% more than France.
Do Cycles Matter?
A 5-year analysis presented by John Gannon in January 2024 had counter-intuitive findings.
Despite 2021 marking the height of the last VC bubble, the average salaries for VC roles such as Analysts/Senior Analysts and VPs/Principals were at their lowest, showing a continued upward trajectory into 2023. Conversely, for Associates and Partners, the post-2021 period reflects a reset with a slight decrease or stabilization in average salaries, aligning with a more cautious market in 2023.
These trends may indicate a strategic adjustment within some VC firms, and suggest that compensation for some roles has been resilient to market corrections. Discrepancies may also come from the samples used, which, as for most of these studies, are limited.
Watch the webinar for more details regarding Venture Capital compensation packages between Corporate VCs and independent VC firms and carry by seniority.
VC Job Candidates’ Due Diligence
Individuals pursuing careers in Venture Capital must conduct due diligence before joining a new firm. Too many candidates feel that it’s not appropriate to ask tough questions for fear of missing the opportunity to join their dream VC firm.
Given how long it takes to make money in VC, it’s essential to understand how the firm structures its long-term incentives and tracks its performance. Here’s what you should consider if you’re going through VC job interviews:
Carried Interest: Investigate whether carried interest is offered on the current fund or if it will apply to the following fund, and understand what progression looks like within the firm. This will give insights into future earnings potential and the firm’s growth trajectory.
Portfolio Analysis: Conduct a thorough analysis of the firm’s portfolio performance. Review the diversity of investments, the stages of development, and any notable successes or failures. This will inform the firm’s investment acumen and risk profile.
Vesting Clauses: Look into the vesting schedule for carried interest and other long-term incentives. Understanding vesting clauses will clarify how long you need to commit to the firm to reap the full benefits of your work.
GP Commit: Understand the expectations for a GP Commit, which indicates how much skin in the game the firm’s employees are expected to have. This can also reflect the firm’s confidence in its funds and investment strategy.
When evaluating a Venture Capital firm, the reputation and culture are as significant as the financial aspects of the job. A firm’s reputation, built on past performance, ethical practices, and industry standing, can significantly impact career progression and personal fulfillment. Equally, the firm’s culture—its values, work environment, and approach to decision-making—must resonate with one’s own principles for long-term job satisfaction.
Speaking with the Founders of the firm’s portfolio companies can provide invaluable insights into its operational effectiveness, integrity, and the value it adds beyond capital. These conversations can reveal how the firm supports its investments through challenges and growth, further informing its true ethos and partnership approach.
Is Venture Capital Compensation Enough To Validate The VC Career Choice?
Venture Capital can be a lucrative career, but the path demands a nuanced understanding of its rewards and challenges. This section examines the motivations behind choosing a career in Venture Capital, comparing it to founding a startup, acknowledging the inherent difficulties of the job, and emphasizing the importance of passion over financial incentives.
VC vs Founder: Weighing the Financial Prospects
Tech enthusiasts often ask me whether they should choose between a career as a Venture Capitalist and that of a Founder. The choice presents a dichotomy of financial outcomes and work-life balance.
Founders often face a high-risk, high-reward scenario where their financial success is tied to the success of one venture, which can lead to a significant payday or total loss. In contrast, VCs have a more diversified risk profile, with financial success spread across multiple investments. While the upside for a VC may not reach the heights of a successful Founder’s single-exit windfall, it offers a more consistent and balanced financial trajectory over time.
The question seems to be common, as several online posts discuss it. The article by SaaStr Founder Jason Lemkin discusses the financial outcomes of being a Venture Capitalist (VC) versus a startup founder.
VCs Have Higher Income Stability: VCs generally have a higher chance of earning a good and stable income, as their salaries are funded by the management fees from their LPs, providing a stable income over a decade regardless of fund performance.
Founders Potentially Earn More: Exceptional Founders have the potential to earn significantly more. A notable example is Zoom, with its CEO, Eric Yuan, holding a stake worth $22 billion at the time Jason Lemkin wrote the article mid-2020—vastly surpassing any VC in Zoom (Emergence Capital and Sequoia each had a c. $10 billion stake).
Carry Distribution Among VCs: The article breaks down a hypothetical $10 billion proceed for a VC firm’s partners, showing that after the LPs take their 80% share and the remaining 20% is split among the partners and the rest of the firm, each partner would potentially earn $400 million if the carry is evenly divided.
The Founder’s Journey Is Harder: Despite the staggering amount a Founder can make from a successful endeavor like Zoom, the journey is much more arduous, involving long hours and substantial risk, especially in the early days of a startup.
“Being an entrepreneur is a lot harder than writing a check and coming to a few board meetings.”
Jason Lemkin – Saastr
Beyond Money: The piece concludes that choosing the Founder path is about more than just the money. The drive to build, the passion for innovation, and the commitment to seeing a vision come to life are critical aspects of the career choice between entrepreneur and Investor.
VC Is Hard, Too
The allure of high returns in Venture Capital can sometimes overshadow the reality of its demanding nature. From the relentless pursuit of the next big thing to the meticulous nurturing of the current portfolio, the role of a Venture Capitalist is multifaceted and challenging. This difficulty is often underappreciated outside the industry and should be a critical consideration for anyone drawn to the field for its financial prospects.
Success in VC requires the fortitude to endure the inevitable misses. The job is as much about resilience in the face of failure as celebrating success. I listed the qualities needed to be an elite VC—including being comfortable with failure and not caring too much about what others say—in the article below.
No wonder many VCs have reported episodes of burnout and left the field. Several reasons explain the situation:
On-Call Expectations
Venture Capitalists often operate within an “always-on” expectation, required to be available around the clock for partners, portfolio companies, and investment opportunities. This non-stop availability can significantly impact personal time, leading to strained relationships and a blurred line between work and life.
“Venture Capital is a hustle game. You’ve never finished, there’s always some other piece rock you could turn over, an executive you could try and recruit and so you’re never done.”
Bill Gurley – Benchmark (Source: YouTube)
Being perpetually on-call, especially in an era where digital connectivity is ubiquitous, means weekends and evenings are no longer personal sanctuaries, contributing to a relentless work pace that can lead to burnout.
As I explained in my article on Founders’ mental health issues, emotional exhaustion is one of the three dimensions of burnout—alongside cynicism or detachment, and reduced professional efficacy.
Market Pressures
The volatile nature of the tech market, particularly evident in the recent downturn, places additional stress on VCs.
The recent tech downturn has increased stress, with VCs guiding portfolio companies through cutbacks and experiencing difficulties in fundraising. They are tasked with guiding portfolio companies through financial cutbacks, strategizing around market unpredictability, and facing the challenge of raising funds in a less receptive economic environment.
Many VCs who joined the industry in the last ten years are experiencing their first crisis. They must learn to make “life and death” decisions concerning startups whose Founders they’ve known and befriended for years. Reinvesting amid uncertainty, as described in the article below, is the most challenging decision VCs face, generating enormous stress.
These pressures are compounded by the expectation to deliver consistent returns to investors, making the role of a VC increasingly stressful in uncertain market conditions. Raising funds is taking longer, adding uncertainty about the possibility of continuous pay.
Competitive Culture
The Venture Capital industry is marked by intense competition, not just among firms for securing the best deals, but internally, as professionals vie for promotions and recognition.
This competitive environment can foster a culture where high stakes and high pressure are the norms, potentially leading to unhealthy work environments. The drive to outperform and secure one’s position can exacerbate stress levels, contributing to a culture where burnout is a significant risk.
It’s just a very competitive and inhumane environment that we create for each other.
Swedish GP (Source: Sifted)
As I mentioned in my article on the secret VC investment criteria, a partner’s internal standing impacts their influence in swaying decisions during investment committees.
Public Visibility
In the digital age, VCs are expected to maintain a strong public persona, often necessitating continuous engagement on social media and attendance at key industry events.
This requirement to be “seen” adds a layer of pressure, as VCs must constantly market themselves and their firms, build and maintain extensive networks, and stay on top of industry trends.
The compulsion for public visibility, heightened by the constant connectivity of social media, can lead to dopamine-driven feedback loops. This continuous engagement, while necessary for maintaining visibility, carries well-documented risks associated with dopamine surges, such as addiction to digital validation and the stress of constant content creation and interaction.
Such an environment can exacerbate burnout by not allowing individuals to disconnect and recharge, keeping them in a perpetual state of alertness and responsiveness to the next like, comment, or share.
Isolation
Contrary to transaction-driven jobs like investment banking and private equity, VC work is mainly isolated. Most VC firms are small and top-heavy.
Individual deal success can significantly influence one’s career trajectory and compensation, leading to high stakes for every investment decision. This emphasis on individual performance creates a work environment where one’s value is closely tied to the success of their investments, fostering a sense of isolation. The pressure to perform and the potential for significant financial implications can make the role intensely stressful, contributing to feelings of burnout among VCs.
Conclusion: Do Venture Capital For The Job, Not The Money
Venture Capital is a demanding field characterized by high risks and potentially high rewards. Constant on-call expectations, market pressures, competitive culture, public visibility demands, and the isolating effects of individual performance metrics mark the journey. These factors contribute to an environment where burnout is present, underscoring that financial rewards, which can be elusive given the management fee and carry structures, are often accompanied by substantial personal costs.
Pursuing a career in VC for the money alone may overlook the intense personal investment and challenges the job entails. True satisfaction and success in Venture Capital stem from a passion for the craft, a commitment to fostering innovation, and the fulfillment of empowering new ventures. It is those who find purpose and enjoyment in the unique dynamics of the startup ecosystem that thrive in VC, not just financially but holistically in their career and personal lives.
