You’re Not Really Getting Paid Anytime Soon
Get used to it.
You’re a venture capitalist, so you’re interested in getting paid. Of course there are other, more intrinsic motivations on why you’ve chosen this career path, but you’d be lying if the potential economics of the profession wasn’t at least one component.
Unfortunately, and it’s been said before, venture capital is a “get rich slowly” kind of business.
Clearly, VC compensation is high by most standards. It’s an absolute privilege to work in our industry, one which isn’t easily accessible to most, especially to many from some underrepresented communities. Before embarking on a post about comp, it’s important to acknowledge this fact and that it’s something we should collectively as an industry strive to improve. That being said, compared to your private equity and your hedge fund friends, if you’re reading this post, then you’re going to be lapped soon if you haven’t already. Yes, you probably knew that was going to happen. Yet even compared to your friends at BigTech who are paid meaningfully in RSUs, as you’re building your career in your 30’s - it won’t be obvious that building a career in this segment of the financial industry makes, well, financial sense.
But what does this actually mean and how can it be? Sure, the salary compensation through your career is in line fair enough with any professional role. But venture capital fortunes are made only one way: through carried interest. This carry, a piece of the typical 20%+ profits of a successful fund, unfolds at a pace which can be painfully slow from a career arc perspective.
Take my (real) friend as an illustration. He started his career as an analyst then associate at a large firm for six years. Then after business school he went into a killer operating role for a while before taking a salary pay cut (!) to return to VC joining a firm in the midst of a generational transition. As a newly-minted “small p partner,” he received some modest but not meaningful carry allocation share. The good news is that over the past two fund cycles (three years each), he’s proven himself to be an effective investor with a number of highly promising portfolio companies to his credit. So he was just promoted to Managing Partner now that the generational transition is complete and finally granted a sizable stake in the next fund.
As a backdrop to this narrative, it’s important to remember that the median time to exit for VC-backed companies is six years from initial financing. So depending on the stage of investor you are, it can be a half decade or more before realizations in a fund start to accrue. This happens because typically the carry on a fund isn’t paid out until after all of the original capital has been returned, therefore a fund usually needs multiple successful exits before distributing profits.
So here you have a situation, where my friend is a Managing Partner at an established name-brand firm, with a dozen years of venture experience, and he hasn’t yet seen a carry check from either of the first two funds he’s been a partner of. When those first few checks do come, they’re likely to be small - it’s only when this new fund he’s currently starting starts to mature… six or more years from now!... will he really get paid. And that’s IF it ends up being a profitable fund, which depending on the data you review, a majority of funds are not.
Moreover, I have a handful of peer managing director friends, particularly at large multi-stage billion dollar funds, who have taken out personal loans just to make their required “GP commit” (the obligation of general partners to invest their own personal capital as a certain percentage of the fund’s capital base). Because those fund sizes have a lot of zeros, so do they require commensurate capital commitments with a lot of zeros. Absent a prior personal fortune, however, a lot of those healthy salaries which you read in VC compensation reports goes to (besides taxes) capital calls and servicing debt on outstanding loans. With that as a backdrop, Keeping Up with the Joneses from a lifestyle perspective can be quite a challenge!
The above reality about the VC “get rich slowly” business is what it is, and can only be changed at the margin. Want to get paid sooner? Go upstream to growth equity, or better yet, go into private equity instead.
The real takeaway from this VC compensation reality is to understand and appreciate it, setting your own expectations and mindset about not meaningfully increasing personal burn rate in the coming decade. It’s particularly challenging to avoid mimicking lifestyle increases lock step with peers in related but adjacent industries. This trap should be avoided. If this approach isn’t congruent with how you want to live your life, completely understandable, but better to get out of the VC game sooner rather than many years into it when the treadmill runs too fast.