PS#100: The Trends of VC Compensation
As with most data sets, I think context is important.
Something I’ve been attempting to do over the years is track the trends of VC compensation data. How are cash compensation and carry allocation trending?
And, more importantly, why?
For that second question, it’s a bit of conjecture on my part. I can’t say for certain, but being a member of this industry for the better part of a decade, I’ve picked up some of the underlying trends and motivations.
And so, that’s exactly what we will be discussing today.
I’ve compiled the last few 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
On a more practical level, we’ll look at this by role so that you’re armed for any future discussions or negotiations. I’m going to keep this to non-partner roles since I’ve got more data in these areas. Hopefully, at a later point, I’ll be able to compile what new partner compensation trends have been over the past few years.
Alright, without further ado, let’s dive in.
Setting the stage, an expanding industry.
Too Much Capital
Over the past few years, we’ve watched the venture capital industry expand significantly with record setting amounts of dry powder for investment, estimated to be over $300B by Pitchbook.
In my humble opinion, this is an insane amount of capital for this asset class. It was driven by the large amount of funds raised during the pandemic period, particularly by the largest players in the industry (“mega funds”). Alongside this boom in capital, we saw an influx of new talent come into the industry (i.e., a lot of new VC hires).
A Flight to Quality
However, as we drift further and further from those pandemic years, the ability to find quality deals has become harder and harder. Instead of spreading this capital across an increasing volume of different deals (or startups), the capital is being concentrated into rounds for the biggest, most exciting opportunities (i.e., OpenAI, Anthropic, etc.). In essence, we are dealing with a trend of decreasing number of deals compared to the significant amount of capital.
The industry, in general, is working through a gluttony of capital, trying to find those venture-like returns (and it’s taking some time). While the mega funds can participate in these larger investment opportunities, the smaller funds are dealing with the turbulence that’s been left in their wake. More specifically, higher valuations, larger round sizes, increased competition, etc.
Mega Funds vs. The Rest
All of this has put the venture capital industry in an interesting position…
At the top, we have the mega funds, raising larger and larger funds, pouring more capital into a concentrated pool of assets (or startups). Meanwhile, the rest of the funds are trying to figure out how to find those venture-like returns in new spaces, at reasonable valuations, with reasonable investment sizes.
It kind of feels like a python trying to digest its meal. The VC industry needs to process all of this capital and rightsize to a more appropriate level of capital. It certainly feels like it’s on its way, but it’s taking time.
So what?
For aspiring investors attempting to break into the industry, there has certainly been a consolidation and a slow down in venture opportunities. However, it’s been more of a slow down and we’re still seeing more activity than pre-pandemic levels. So, to be clear, it’s a step back from the historic levels of the pandemic, but still lots of opportunities.
In the data below, you’ll see the impacts of this trend playing out. We have compensation levels and the percentage of those receiving carry trending downwards (outside of the growth-stage that has dealt with better industry dynamics).
With all this being said, venture is a decade (plus) endeavor. And, over the past 5-10 years, we are seeing growth, institutionalization, and more opportunities. We’re certainly going through some form of a cycle, but the industry as a whole (and over the long-term) is still trending “up and to the right”.
Total cash compensation.
Total cash compensation is defined as the total of salary and bonus paid in a given year.
For the more junior investors, we’re seeing a continuing downward trend from 2023 (heading back towards pre-pandemic levels). The exception being with the more senior VP/Principal level.
The trend for senior VP/Principals is interesting. It most likely correlates with the next generation of investors moving into these senior (and partner-level) roles. Over the past few years, we saw a number of partners retire, leaving the industry after multiple decades. This appears to be a bit of a changing of the guards.
Receiving carried interest.
This chart highlights what percentage of individuals received carried interest as a part of their compensation package.
The allocation of carried interest continues to be a unique, firm-dependent component of compensation. Generally, we’ve seen that more senior investors (i.e., senior associate, VPs, Principals) receive carry and much less allocation at the more junior levels (e.g., analysts, associates).
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, alongside cash compensation. 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.
With cash compensation trending downwards, you’re seeing the percentage of carried interest received by non-partner investors tick upwards. It’s still well below partner economics (upwards of 10% for new partners), but it’s getting better.
The most fascinating piece is the jump at the VC/Principal level. Again, it feels like a “changing of the guard” to retain top talent for the next generation of these funds.
As a reminder, VC 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.
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 early-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.
