Bigger Isn’t Better For VC Funds
I disagree with your premise on why VC’s want to launch bigger funds, David. Nobody is retiring off of the management fees at VC firms. They just don’t raise enough capital for that 2% to significantly moves the risk-adjusted needle, especially across partners, associates and support. I don’t expect we’ll ever see mega-VC’s like we do mega-hedge funds today where yes, management fees on $10-30B+ AUM really does turn them into asset aggregators more so than asset allocators (much like mutal funds, but with an insane fee structure). In addition to falling startup costs which you’ve mentioned, the explanation of VC’s comparative capacity constraint is simple - limited mandate, illiquidity, deal flow, deal complexity, oversight, and significant goose-egg returns risk.
Originally posted as a comment by gbattle on Jumble Thoughts using Disqus.Andreesen Horowitz raised $300 million, and it’s just the two of them, with minimal staff. That’s $6 million a year, for 5-10 years, guaranteed regardless of outcome. I admit to a certain amount of cynicism, but I bet there are a bunch of lesser VCs that would take $500,000 in salaries for 5-10 years even if they didn’t truly believe they could provide their LPs with the expected ROI.
(VCs that read my blog, I am most definitely not referring to you. It’s those other guys, you see.)
The Andreesen Horowitz investment mandate and capital raise is an exception in terms of flexibility and size respectively, not the rule. If you believe $3mm/yr moves the needle for Andreesen vs. his realistic opportunity cost (and personal investment in the fund), I’d say you’re mistaken. As for your hypothetical $500K salary goose-egg returns VC, maybe I’m being cynical about the inherent greed in the investment business, but he probably has a significant investment in the fund too. Ergo, if he doesn’t generate returns, he’s effectively turned his $5mm personal investment in the fund into a 10 year $500K/yr annuity, with no interest. Not a good look.
Love the caveat - enough to steal it. (Mega-hedge funds that read my blog that I happened to interview with recently, I am most definitely not referring to you. It’s those other funds, you see).
