PS#068: 3-Year View of VC Compensation
As with most data sets, I think context is important.
One year of VC compensation is great, but if we can compare it against a broader pool, that’s even better.
Well, that’s exactly what we will be discussing today.
I’ve compiled the last three years of compensation surveys from the EVCA community to give us a broader perspective of VC compensation.
At a high level, we’re going to review the following…
Total cash compensation
Percentage of investors receiving carry
Carried interest percentage
We’ll look at this by role so that you’re armed for any future discussions or negotiations.
Alright, let’s dive in.
Setting the stage, an expanding industry.
Over the past few years, we’ve watched the venture capital industry expand significantly with record setting amounts of dry powder (currently $302.8B) for investment. The inflow of capital during the pandemic appears to have been the main driver.
During the pandemic period, large funds raised unbelievable amounts of capital alongside tons and tons of new, smaller funds being launched. This combination led to the record setting amount of capital we have in the industry today. It also drove an increase in venture capital hires to help deploy all of that capital.
While the amount of capital in the VC industry increased dramatically, the amount of deal flow has not kept pace. We witnessed historic deal volumes and capital invested in 2021 ($347B) and 2022 ($244B), but 2023’s deal volumes ($170B) have started to return to pre-pandemic levels of investing.
The contraction of deal flow has led to the consolidation of investment teams. Many firms have recognized that they won’t be deploying (or raising) as much capital as initially expected and are starting to rightsize their organizations. We can see this starting to play out in terms of compensation, carry allocations, and the amount of new roles available in the industry.
To be clear, this is a step back from the historic past two years. But, the industry overall is continuing to grow and expand, especially when looked at over the past 5-10 years. We are seeing more institutionalization and generally more opportunities, even as the industry goes through this market cycle.
Total cash compensation.
Total cash compensation is defined as the total of salary and bonus paid in a given year.
Total compensation appears to be following the trend of the market more broadly.
We can see the jump in compensation from 2021 to 2022 across all levels, following the significant increase in venture capital funds raised. However, from 2022 to 2023, we saw the opposite, at least a slight regression in total compensation across all roles.
The contraction is most prominent at the analyst and associate levels. With lower deal volumes, firms are comfortable reducing these roles, as they were mostly dedicated to sourcing new deal flow. Meanwhile, senior associate, VP, and Principal roles have held relatively steady, highlighting the value of “full stack” investors, who can handle everything from deal sourcing to closing transactions.
Receiving carried interest.
This chart highlights what percentage of individuals received carried interest as a part of their compensation package.
Carried interest continues to be a unique, firm-dependent component of compensation. Generally, we’ve seen that most of the associates, senior associates, VPs, and Principals at venture firms receive some form of carried interest.
However, this isn’t as simple as it sounds.
A lot of carried interest may be tied to conditional factors, such as the performance of the firm or your level of contribution across sourcing, diligence, and execution of the investment.
For the most part, firms continue to use carried interest to align incentives for junior investors. Of course, the weight of those incentives very much depends on the percentage of carried interest, which brings us to our next topic…
Carried interest percentage.
Carried interest is defined as the individual’s percentage of carry going to the VC firm.
Venture Capital carried interest continues to be defined by the power law. The majority of the firm’s carried interest resides with the GPs (i.e., those raising the fund), leaving the rest to be distributed amongst the junior investors.
For the most part, the barrier for pre-partner investors appears to be ~3%. We’ve seen an uptick in the amount of carry “full stack” investors are receiving (e.g., senior associates, VPs, & principals), while the more junior positions are still receiving relatively small amounts.
Carried interest is the holy grail of venture capital compensation, but it’s important to understand what this might actually mean for you. As an example…
Suppose you are a VP or Principal at a $100M Pre-seed / Seed stage fund with a 20% carry structure. Your carry is 2.5%, which means that you receive 2.5% and the rest of your firm receives 97.5% of the carried interest.
If that fund ends up hitting a 3x (i.e., becoming worth $300M in distributed capital), $100M will be paid back to the LPs with ~$200M of gains (not including fees or structural nuances). LPs will receive 80% of that $200M, while the fund will receive 20% or $40M (i.e., the carry).
Because your carry is 2.5%, you will receive $1M (2.5% x $40M) before taxes.
Not too bad.
Of course, there’s a couple of things to remember.
The average life of a fund is ~14 years. That’s a long time to wait.
You will typically collect additional carry (or negotiate for more) in current and/or future funds the longer you’re with a firm.
In the end, it comes to the same answer. That carry number is one that depends on your commitment to the firm, fund, and industry. If you’re in it for the long haul, it can be quite valuable. If not, it’s a lot less relevant to your overall compensation negotiations.
