How many points of carry would it take for you to work without salary?
"Hypothetical" scenario:
A debut micro-VC fund with $10 million in assets has an opening for a junior investment team position.
At 2% per year, the fund only has $200k a year to cover all fund expenses and overhead. The fund has two general partners. Neither of the general partners are taking any salary. The general partners have above-average intelligence and strong operating experience with successful exits under their belt (i.e. you believe you would be able to learn a significant amount from them), but this is their first time doing VC.
The general partners have put into writing that the junior position will start receiving a salary if they successfully raise a larger Fund 2 in the future.
Position is remote so you can live and work from wherever you like. You could even live with your parents to save on rent.
What is the minimum amount of carry you would need to consider doing this junior position with no salary?
Interesting question. To me, a hypothetical pinch of carry that I might (only might) receive as the result of working at a first time $10 million fund with an untested strategy cannot pay for my rent, my food, new socks, toilet paper, etc. Actually, it can’t pay for anything, because it doesn’t exist. That being said, if I was independently wealthy, was only interested in doing VC, and was willing to undertake the financial and career risk (opportunity cost of forgoing guaranteed $100k+ salary through a normal job) , I would do it for a significant level of carry (20-30%), which is obviously not what you’re looking to shell out. I think unpaid college interns would really be the way to be.
Assuming a 25% irr every year for the fund, your projected fund size at the end of 10 years is about 75mm. Less initial invested capital and you're left with 65mm profits of which you take 20% as carry. So overall carry for the fund would be 12.9mm over 10 years which is about 1.29mm per year. A vc professional would probably like to earn over 10 years a least an average salary of 250k a year so I'd say they'd probably ask for at least 250/1290=19% of the overall carry or 380 basis points.
This is a pretty ideal scenario tho so I'd say 380bp is the bottom bound since a 25% irr is pretty good for a first-time fund and VC professionals and you're asking someone to take a lot of risk for a pretty average projected annualized salary.
This is a tough one as you are likely going to have to give away a lot more via carry.
Given a) the early stage nature of the investment and b) lack of track record the carry is likely to be pretty barbell shaped. Also assume it would take more than 5 years of the fund does get to carry.
The other consideration is that luck probably plays a bigger role in venture than buyout so you and the team might do everything right but not find that 20-100 bagger.
Is there any way you can get to fund 2 without junior support?
The bigger question is why would ever take this sort of risk without real upside.
What kind of founders can only scrape together a $10mm launch, and how piss poor has their career been that they can’t even seed the GP enough with capital so they can hire real professionals who expect to get paid.
The OP said "micro-VC" which means they are focused on very early stage tech startups, in which case $10m is actually not that bad. $10m is basically for creating a "proof of concept." At $200k per investment, they would be able to make 40 investments in seed-stage companies and if enough portfolio companies are marked up by upstream investors, they could probably raise a bigger second fund.
Alexis Ohanian and Garry Tan "only" raised $7m for their debut fund back in 2011 (latest fund is well over $200m) Of course, it helped that they got in super early into companies such as Coinbase...
He's not wrong. Only being able to get together $10M for a first time fund is terrible. If that's the limits of their networks, think of what deals they'll be able to get into...
If you’ve been working for 10-15 years in the industry and are a halfway real guy, you can raise $10mm. But why would you? It’s stupidly subscale. What are you playing for... to hit a 3x MOIC (very unlikely) and make $4m in carry across 5-7 years, a huge chunk of which you’re using to pay your yet unpaid team.
Then what? You level up to a $30-50mm fund. Hit a 2x and make another $6-10mm, again across 5-7 years and splitting it with your team. And that’s the phenomenal outcome. So yeah quitting your job to launch your own fund so that in a close to best case scenario you can make $10-14mm (before expenses) across 10-15 years is stupid if you’re a real guy at a real firm. Unless you’re not a real guy, in which case it MAY POSSIBLY make sense, but still not a given.
More to the point, it certainly would not make sense to be that person’s junior guy getting paid with hugs and free Brazilian roast Flavia.
If you’re really that good, instead of launching with $10mm, you’re better off “renting” Andreesen Horowitz’s balance sheet and infrastructure. You would do way better, both in terms of earnings and personal brand equity appreciation (translating to how much money you could hypothetically raise). If you are actually that good and all you can raise is $10mm, that probably means your “IPO” is premature.
And the guys you’re citing, the reason you are citing them as an example is because theirs is an outcome worthy of remark; they are remarkable. Or said another way, that’s an idiotic anecdote.
From someone in the industry, I want to be explicit that you should not do this.
VC industry returns are the most stratified between good and bad of any asset class... meaning that ~75% of new funds only return the initial capital + hurdle rate or even have negative IRR (and obviously don't raise subsequent funds).
While there have been successful principals from all kinds of backgrounds, the description you've used leads me to believe this is an exceptionally "at risk" bunch... flagging 1) the fact that the leaders have no investing experience and 2) they only raised a very small amount of capital. On the latter, if these guys were actually super successful, they should be able to drum up >$10M between their own bank accounts and their rich friends in their sleep. At best it means they see the fund as a lifestyle business / retirement hobby, worst case it means they have some big red flag alienating peers (much less institutionals!)
Finally, even in an upside case where the fund is actually successful, early-stage returns take the longest time to realize of any asset class, so it will likely be 5-10 years before you see a dime from this carry.
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