Venture capitalists’ huge pay is tempting fate

In recent days, prominent venture capital funds have come out with survival tips for their portfolio companies. While asking startup founders to tighten their belt is sound advice, it’s worth wondering when venture capital titans might be urged by their investors to scale back their own pay, too.
Their compensation has been rising fast. Last year, median cash pay for a partner at a venture capital firm, including base salaries and bonuses, rose 10% to $928,000, reported The Information, citing a survey conducted by Holt Private Equity Consultants. Managing general partners would be paid a lot more. In testament to their earning prowess, more venture capitalists are joining the ranks of hedge fund managers in buying properties in Palm Beach, Florida, one of the world’s most exclusive enclaves. Last year, Scott Shleifer, co-founder of Tiger Global Management’s private equity arm, purchased a home there for a record $132 million.
Months later, Jeffrey Epstein’s onetime estate, located roughly a mile from former President Donald Trump’s Mar-a-Lago, was sold for $25.8 million to David Skok, a serial entrepreneur now at Matrix Partners. Venture capital firms make money from management fees and carried interest, or the firm’s profit share from their investments. However, in the last two years, a whirlwind of fundraising — thanks in large part to the Federal Reserve’s unprecedented quantitative easing — allowed top venture capitalists to make a handsome living on management fees alone.
Private-market fund managers have been coming back to fundraising six months sooner than the norm; in addition, more than 80% of the time, they increased the size of their next fund, with a median step-up of 60.9%, according to PitchBook. Case in point: In March, Tiger Global, now the world’s busiest venture capital investor, raised $12.7 billion, almost twice its previous fund, which had collected $6.7 billion just a year earlier.
Here’s the beauty of large fund sizes. While the carry — or profit share — is paid to a VC when holdings are sold, the management fee is collected every year on the capital investors had committed. For instance, with a typical 2% fee structure, a new $10 billion fund with, say, a five-year horizon, could collect $1 billion in fees alone over time.
As such, rapid fundraising has spawned dizzying wage inflation. Even associates, who are typically a few years out of college, earned
a median salary and bonus of $196,000 last year, according to The Information. And since fees alone could cover all of a firm’s personnel expenses, they enable general partners to keep carry — potentially the most lucrative source of compensation — mostly to themselves.
But the world is changing. As Sequoia Capital recently warned its startups, “capital was free. Now it’s expensive.” It’s a matter of time before top-tier VC investors, such as pension funds and college endowment funds, ask whether they have overpaid. Already, the Securities and Exchange Commission has announced plans to force greater fee transparency on private-market fund managers. Often, investors pay above and beyond the typical 2% management fee. Some funds bill activities such as travel related to deal sourcing, hosting annual investor meetings, or even legal expenses to fulfil regulatory requirements, to their clients.
—Bloomberg