How venture capitalists make money through management fees and carried interest, emphasizing their focus on big returns and rapid growth.
How venture capitalists make money through management fees and carried interest, emphasizing their focus on big returns and rapid growth. Understanding these mechanics can help founders navigate the VC world and raise capital more effectively.
hey guys so every founder thinks that VCS Venture Capital firms make money by finding the next unicorn but that's not actually the true they are actually not really benefiting from the startup You're Building yourself it comes from something completely different and today I'm going to break it down for you I'm Alejandro creatis and I've been involved in hundreds of deals so let's start with actually how Venture Capital firms you know really make money so there's two ways number one one is via management fees where they typically would get 2% of the total amount of money that they've raised and number two is basically the carry interest which is typically 20% carry which is essentially the amount that they will be getting on the profits so how would this play out for example if they've raised a $100 million fund that means that they will be getting 2% in management fees over the course of
let's say the 10year fund cycle which is going to be about $20 million if they are charging let's say 20% carry and it's again on that $100 million fund as the example if they were to return let's say $200 million on that $100 million that they invested so the total money coming back is $2 200 million that means that they will be returning 100 million and there will be another 100 million of the profits where they will be taking their 20% out so in this case it will be 20 million that they will be making in cared interest in addition to the 20 million that they will be making in the funds live on that management fee so what does that mean for you VES are ultimately incentivized to go big or go home because onethird of their portfolio companies is going to go out of business onethird is going to break even and then another third is going to return all of the funds and more your interest
may not be necessarily aligned with them so that's very important you know to really keep in mind so that you're able to align to certain degree your agenda with with theirs especially when you're bringing them into your own Journey so what does this actually mean let's say for aspiring VCS that are watching essentially what this means is that it may take 7 to 10 years to actually realize that carry that you will be getting so you're going to be relying for the most part on those management fees on a yearly basis that you're going to be getting to cover the cost of the fund plus also your salary and your colleague salary so ultimately to raise a fund you need three things you need the limited partners which are the investors in the fund typically that could be family offices height netw worth individuals or Pension funds or endowments and then the next thing is you need to have an
amazing source of deal flow of amazing deals that are coming your way and then lastly you need to have figure out a path to get those deals to provide fantastic returns it's not just about being good at startups if you're a good venture capital guy it's oral it's all about building relationships managing capital and also generating incredible returns and great liquidity events from those startups that end up going either through an IPO or that get their company acquired for a lot of money if you are a Founder it's important to understand the game they're playing and if you are a VC or looking to become a VC know that the path may be long to real wealth but if you're able to structure it right there is always a way to get there either way knowledge is leverage so if you're now looking to raise money I would love to help out feel free to reach out I'm at alejandr chatis.com Consulting we
love to have a session with you and explore what's possible [Music]