The compensation disbalance in the Venture Capital / Private Equity world remains quite stark. Take a look at the chart a friend once sent me showing some concrete data on VC compensation, and Private Equity industry performance.
VCs without much of an
operating background constitute a trigger-happy lot, operating based on
spreadsheets rather than experience or intuition. Of course there are exceptions,
and VCs like John Doerr and Mike Moritz have created enormous value, and have
effectively helped build the ecosystem as we know it today. Nonetheless, the
few rounds of Silicon Valley Gold Rushes have made it
possible for opportunists who have also managed to flourish.
As for the
compensations, General Partners at Venture Firms make anywhere between $1
Million to $3 Million a year without counting performance incentives. The carry
is all upside. PE firms pay a lot more, and it is not unheard of that Partners
at PE firms make $50-$100 Million a year. Then of course, there are the Hedge
Fund Managers, who are also absurdly heavily compensated, who these days are
getting into the late stage venture capital game.
contrast, the poor entrepreneur bootstraps a startup, takes enormous risks, and
if (s)he raises venture money, the first thing a VC does is to restrict his/her
salary to a minimum.
It is a
well-known fact that Silicon Valley startup CEOs are a dramatically under-paid
bunch. For what it takes to do the job – the kind of stress, travel,
opportunity cost, failure rates – many savvy entrepreneurs and executives have
figured out that it isn’t worth it to be the CEO of a venture funded startup
(if you have other options, that is). Being a VP is even worse. Only one out of
50 startups succeed (or may be one out of 100, I don’t know the exact ratio),
so the equity component of the compensation package rarely pays off after the
liquidation preferences, etc. are settled.
I would go
so far as to submit, working for a VC-funded startup is more like having any
other job, than true entrepreneurship where you actually are your own boss.
Entrepreneurs / CEOs answer to a Board. There is a compensation committee that
decides how much you make. You get fired and washed out of your equity stake
based on the VC’s whims. This may be perfectly legitimate at times, since not
all entrepreneurs scale to become good CEOs of larger companies. But often, these
decisions are gut reactions, not legitimate, and entrepreneurs get slaughtered
due to the VCs’ lack of experience or seasoned intuition.
history, it is the entrepreneurs who have built companies and shaped economies,
not money managers. It is just plain wrong that we have created a system that
compensates these builders at rates that are so much below the money managers.
incredibly important for us, as an industry, to solve this problem, and come up
with a sustainable business model and incentive structure. Otherwise, talent
will continue to be mis-channeled and applied to unworthy causes.