That's what happens when you're an investment manager. You're paid to do something, anything. If you just sit on cash, your investors aren't going to keep paying your fees.
That's for the carry. If the market crashes and their investments fail, their carry income will be zero anyway.
VC's do get paid even if they don't invest via their management fee. It's certainly enough for them to live comfortably on while investing the fund over a ten year cycle.
But, to your point, there's another dynamic here: if they don't invest (and thus have no carry), they will be less likely to be able to raise future funds.
Just saying that it's not as simple as saying there's a conflict of interest. VC's do have a fiduciary duty to their investors and their income is tied, at least in part, to their ability to make money. Even if they lose all of the money, there is no direct cost except for possibly a quite substantial lost of reputation.
The risk to entrepreneurs is not symmetrical. No guaranteed salary is available to entrepreneurs. Even if a portfolio company fails, VC's still receive a management fee.
This system works surprisingly well, except when VC's are stupid or screw entrepreneurs. It's actually pretty amazing that it works at all, since really the middlemen hold most of the power as the distributors, but not originators, of the capital.
Comments
I have a hard time even reading any of these pieces where a VC is complaining about high burn rates / valuations all while continuing to invest.
"Because my competition will continue to invest" is not a good reason.
You don't see Warren Buffet investing at valuations he believes are untenable, just because the market happens to be up.
That's what happens when you're an investment manager. You're paid to do something, anything. If you just sit on cash, your investors aren't going to keep paying your fees.
Sure it is. VCs aren't the money guys, they just invest the funds of the money guys. Not investing really isn't an option for them.
VC's are paid to invest intelligently and get a return.
But they have a conflict of interest because unless they invest, they don't get paid.
That's for the carry. If the market crashes and their investments fail, their carry income will be zero anyway.
VC's do get paid even if they don't invest via their management fee. It's certainly enough for them to live comfortably on while investing the fund over a ten year cycle.
But, to your point, there's another dynamic here: if they don't invest (and thus have no carry), they will be less likely to be able to raise future funds.
Just saying that it's not as simple as saying there's a conflict of interest. VC's do have a fiduciary duty to their investors and their income is tied, at least in part, to their ability to make money. Even if they lose all of the money, there is no direct cost except for possibly a quite substantial lost of reputation.
The risk to entrepreneurs is not symmetrical. No guaranteed salary is available to entrepreneurs. Even if a portfolio company fails, VC's still receive a management fee.
This system works surprisingly well, except when VC's are stupid or screw entrepreneurs. It's actually pretty amazing that it works at all, since really the middlemen hold most of the power as the distributors, but not originators, of the capital.