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How VCs Make Money

vcstarterkit.substack.com

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Re: How VCs Make Money

#41

Post by davidu »

motohagiography wrote: post #29

Wow, what a great post. The most interesting question for me is, if you are a company with VC money and they are on your board, does the age of the vintage of the fund the money came from impact the strategy of the company down to a product level? It looks like you could literally calculate/estimate the time left in the fund and see how much pressure it will put on the CEO to get positioned for an exit, then predict…

Most funds these days, at large firms, are fully deployed within three years. So a ten year fund still has 7 years left on the clock, and then there are ways to extend the clock beyond that.

The huge winners take even longer to reach a liquidity point, and this class of investors are very patient.

Re: How VCs Make Money

#42

Post by flashjpr »

> Do you need $200M to operate a twenty person firm for four years and to keep the lights on to make follow on investments for the next six years? Not really.

What a joke. Ofc you do. Like all satire aside, that's a middle-class statement.

Re: How VCs Make Money

#43

Post by vcstarterkit »

Major_Grooves wrote: post #39
vcstarterkit wrote: post #11

Earlier quoted context omitted.

Partners have two jobs at firms: raise money from LPs and convince great founders to take the firm’s money. If you were hiring a partner you would choose to go in this order: poaching a star partner from another firm, hiring a star founder/operator, an all-star associate at a more successful firm, promoting your own associate. Any of the first three options will help sell LPs and founders on your new fund by bringing…

I remember going to A16Z a few years ago, and everybody was called Partner. Looking at Connie's LinkedIn profile it looks like she too was "Partner" and then promoted to "General Partner". Does that mean the "Partner" title is kinda BS and they only really mean Partner when you are a GP?

Yes, a16z famously lets everyone call themselves “partner” as a form of title arbitrage

https://vcstarterkit.substack.com/p/how-vcs-choose-twitter-b...

Re: How VCs Make Money

#44

Post by posedge »

Bootwizard wrote: post #40
pipogld wrote: post #36

I hate acronyms. I hate them even more when I found them in articles with no reference about what they stand for. Just one reference at the beginning of the text would suffice. That should be a rule in writing articles. Without it, it makes it more difficult to learn something new and it makes the whole text losing intellectual integrity.

You are reading a news site run by a Venture Capital company. I feel like you should know what VC means.

He is probably referring to GP and LP, which are not explained in the text. I found that annoying as well.

Re: How VCs Make Money

#45

Post by bpt3 »

ignoramous wrote: post #4
refrigerator wrote: post #2

Brilliant post — very informative + clearly written. > What goes unsaid, is that only the actual partners in the fund get any carry, associates just get a comfortable salary and the prospects of becoming a partner (at another firm obviously) "(at another firm obviously)" — I've heard this in other discussions about VC careers too. Why is it the case?

> (at another firm obviously) I have no insider knowledge but I guess it might be due to glass ceiling s: https://en.wikipedia.org/wiki/Glass_ceiling

Your username is accurate in this case.

Re: How VCs Make Money

#46

Post by woah »

H8crilA wrote: post #26

One thing that you have to keep in mind is that the 20% part is effectively a European call option on the fund's portfolio, with strike equal to the fund's initial value (so ATM - At The Money - when the fund starts) and notional amount of 20% of the fund's value. The manager gets that option for free, in fact he's paid 2% a year to hold that long option (and do his/hers job). Call options are more valuable if the un…

It’s strange how often people need to be reminded on here that VCs invest in businesses that grow fast or fail. There’s a vocal contingent on here that feel it’s some kind of moral failing and are mad that nobody is getting excited about their bingo card creating website.

Re: How VCs Make Money

#47

Post by achenatx »

ninkendo wrote: post #15

This article needs to define its terms. What is a GP? Sure I can google it but this is supposed to be an article that explains that kind of thing, I may as well just google how VCs make money and read a different article.

Im not an expert, but LP since it refers to investors is likely a limited partners.

VCs are probably also structured as limited partnerships.

Limited partnerships will typically have "General Partners" who have voting control and no liability protection. And Limited Partners who have no voting control, but have liability protection. All the partners are "owners".

A partnership agreement can probably structure control any way, but in my limited experience the above are generally true.

Limited partnerships are tax advantaged structures that dont require any W2 wages to be paid to execs (unlike S corps and LLCs). This means all the money can be given out as distributions which avoid all self employment taxes. The main advantage of an LP (like an LLC or S corp) is that they are tax pass through entities so income taxes are only paid once (unlike a C corp)

Unlike an S corp, limited partnerships can distribute tax liability to GPs and LPs using any algorithm they wish. LLCs must distribute tax liability to shareholders according to their ownership percent.

Re: How VCs Make Money

#48

Post by twoheadedboy »

WooShoa wrote: post #33
notfromhere wrote: post #32

Earlier quoted context omitted.

There was a Kaiser(? maybe someone else) that over a 20-30 year period, most VCs don't return capital. Your average VC fund absolutely underperforms, and even the "good" funds sometimes just get lucky and run with that until the good will runs out. Andreessen's 2010-11 funds have underperformed the market.

I find it interesting when people make a fundamental miscalculation like you did. They perform EXCEPTIONALLY well … when you start understanding who they are performing for. Gold rush … something, something … shovels. But I know. I know. I speak heresy on this site. I repent and beg for forgiveness for saying the kind has no clothes on.

So who are the shovel manufacturers in this case?

Re: How VCs Make Money

#49

Post by csa »

woah wrote: post #46
H8crilA wrote: post #26

One thing that you have to keep in mind is that the 20% part is effectively a European call option on the fund's portfolio, with strike equal to the fund's initial value (so ATM - At The Money - when the fund starts) and notional amount of 20% of the fund's value. The manager gets that option for free, in fact he's paid 2% a year to hold that long option (and do his/hers job). Call options are more valuable if the un…

It’s strange how often people need to be reminded on here that VCs invest in businesses that grow fast or fail. There’s a vocal contingent on here that feel it’s some kind of moral failing and are mad that nobody is getting excited about their bingo card creating website.

> There’s a vocal contingent on here that feel it’s some kind of moral failing and are mad that nobody is getting excited about their bingo card creating website.

LOL. I hope this is HN /s. If so, it has several layers of humor.

The guy who actually created a bingo card creation site has been fairly vocal with his stance that VC money should only be taken for rocket-ship trajectory businesses — with bingo card creation and other businesses he ran not being of that ilk.

IIRC, people have tried to get him on the VC track with a different business to no avail (yet).

Additionally, he (informally?) advises people who are applying to YC, and I think one point he consistently brings up with founders is whether they are sure that their business even wants to go on the VC path/trajectory. I think that’s a great question that many people don’t stop to ask due to the pejorative “lifestyle business” label (cough that might have a high chance of increasing ones net worth by millions rather than billions cough).

Regardless, to confirm and reiterate your point, VCs aren’t looking for singles... their looking for home runs, and they don’t mind striking out while pursuing that goal. If you take VC money, fully expect to be pushed to those extremes.

Re: How VCs Make Money

#50

Post by sambroner »

vcstarterkit wrote: post #43
Major_Grooves wrote: post #39

Earlier quoted context omitted.

I remember going to A16Z a few years ago, and everybody was called Partner. Looking at Connie's LinkedIn profile it looks like she too was "Partner" and then promoted to "General Partner". Does that mean the "Partner" title is kinda BS and they only really mean Partner when you are a GP?

Yes, a16z famously lets everyone call themselves “partner” as a form of title arbitrage https://vcstarterkit.substack.com/p/how-vcs-choose-twitter-b...

Funny article. Surprisingly useful (as someone who is not part of VC Twitter)
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