Dear SaaStr: How Much Money Does a VC Make If Their Investment Sells for One Billion? | SaaStr

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Dear SaaStr: How Much Money Does a VC Make If Their Investment Sells for One Billion?

Often not as much as you’d think. Each general partner might make $5m here on a $1B exit.  And a non-true general partner might make quite a bit less.

Let’s say:

  • The fund owns 10% at exit, with a blended entry price of ~$100m (fund invested early, but also did some pro-ratas) and thus a total blended investment across rounds of ~$10m.
  • The startup raised $200m in total on way to a $1B sale

OK now the fund here would get $100m, or 10% of $1B. But it’s a bit more nuanced:

  • The gain is $90m for this fund, but it might be lower for funds that come in later rounds at the same ownership stake.
  • The gain might also be a bit lower for the early investors if a lot of the money came in at a high valuation, as the investors all get paid back first. (This is more important the closer the exit price is to the amount raised). I.e., if a ton of money is raised, there isn’t as much left to go to the earlier investors as the late stage investors take “1x” their money back first.
  • The partners at the VC fund split 20% of the gain of $90m, once costs are all paid back. The other 80% goes to their “LPs”, the Limited Partners who invest in the venture fund and provide most of its capital.
  • Let’s assume the fund has 3 partners and 2 associates, and each partner has 28% of the carry. Then each partner makes 28% x $18m or $5m off this unicorn.
  • And … this $5m is only received once the fund has paid back all the money its been given to invest in the fund is paid back.

Now $5m is a lot of money, no doubt. But maybe not as much as you might think for a general partner to make off a $1,000,000,000 exit say 10 years after investing.

(note: I’ve oversimplified a lot, because flows of capital in VC are complex, but the above answer is still pretty much accurate)

Published on August 12, 2022

Go to Publisher: SaaStr
Author: Jason Lemkin