The Disbalance Between VC Compensation and the Entrepreneur

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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.

In 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.

Throughout 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.

It is 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.

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