From the standpoint of a founder, the life of a venture capitalist can seem very, very different. It certainly did to me when I was an entrepreneur. The drive down to Sand Hill Road, the corner offices, the Range Rovers and Teslas in the parking lot. The empty parking lots on Friday afternoons.
On the surface, that seems to have absolutely nothing in common with the struggles of the common entrepreneur. And it is different, no doubt.
The pace is different, in particular. A VC firm doesn’t go bankrupt if it doesn’t make payroll. VCs are paid to say “No” far more often than “Yes.” Your results are judged over years, not months and quarters, and it takes a long time to truly fail.
But at the end of the day, I’ve learned that being a partner at a successful early-stage VC firm is not quite as different from being a founder as you might think. In fact, I’ve learned that being a partner at a $150m Venture Fund (more or less my new job) is quite similar to what it is like being CEO of a start-up with a $250,000 monthly burn rate.
Specifically, it feels eerily similar to how I felt when I was CEO at EchoSign when we were at about $4m in revenue.
How can a $150 million fund be anything like a startup with just a few million in revenue? Peel the layers back on this onion and it becomes a little more clear.
The money isn’t really there
First, you need to understand that as a VC, you don’t get all the money upfront. You invest it, in dribbles, over a decade, as you make investments. That $150 million doesn’t just sit in your bank account on Day 1 of your venture fund.
Second, to pay salaries and expenses, venture funds typically charge a 2 percent management fee. That means the VC’s own investors (the “Limited Partners” or LPs) pay them $3 million a year to manage a $150 million fund, an expense that is debited from any profit sharing down the road on the investments.
Now that $3 million sounds like a lot, but you still have to run the firm. You might have three to five partners, three to four associates and principals, and some support staff, plus an office to pay for that has to be somewhat presentable. Don’t forget to factor in lots of unreimbursed expenses — conferences, airplane tickets, and the like.
All of a sudden, that’s a significant amount of expense to cover with $250,000 a month. Ten senior professionals, taxes, offices, trade shows… it’s not that different in fact, from a reasonably well-funded start-up trying to raise a Series B round, with a $250,000 a month burn rate.
So having a $150 million venture fund is a nice place to be, indeed, in the grand scheme of things. But it’s not exactly resource rich – very late Series A or early Series B-esque, in fact.
Third, even if you do well, it takes seven to ten years to make any real money – and that’s the case with many startups out there.
Storm Ventures’ 2005 vintage fund is on a tear, and should return perhaps 400 percent to its investors. This puts it in the top five to ten percent of VC funds, with $2 billion dollar+ unicorns in the portfolio and a number of other strong exits, with more on the way.
But as an early-stage fund, it takes a lot of time for companies to mature. In fact, it’s only in 2014 – a good nine years later – that the fund has returned more than 100 percent of the cash invested. Until then, there are no profits to the VC partners.
And you have to pay back all those expenses we talked about above first.
That means no liquidity for nine+ years, even in a very successful $150 million venture fund! That’s about as long as getting your start-up to IPO – and maybe a lot longer.
You and me? We’re not so different
So don’t get me wrong, being a VC isn’t the roughest job on the planet from a quality-of-life perspective.
But compared to be a successful founder-CEO, it feels a lot like having just gotten my Series B round done. A fun time, indeed, but with another seven to ten years of hard work left to IPO before there’s any economic reward.