Thread by @dunkhippo33

A # of friends who have had success w angel investing have asked me whether they should start a microfund.

There are reasons to do it & also not to but today’s thread is strictly about the economics.

Tl;dr most fund mgrs - even the best - won’t make much $$.

Read on >>

1) When most ppl say VCs are rich, they are really talking about big vcs.

In fact, many microfunds have a worse cash position than many of the startups they back!

2) Most fund mgrs get paid on a 2 and 20 model.

The 2 represents 2% - this is the budget of the fund.

So a $10m fund * 2% yields $200k in budget every yr for 10 yrs.

This budget covers salaries but also marketing, travel, etc

3) So if you have 3 partners & mktg expenses, each partner is making like $50k-$60k.

However if you apply the 2% rule to a $1b fund, their yearly budget is $20m!!!

If you have 3 partners there, everyone takes home $5m+ in salary! Nice!

4) So budgets are low for microfunds. This is why it’s not a great idea to sell products to microfunds - they have no budget!!

5) Now the 20 in the 2 and 20 model represents 20% carry. This represents the profit sharing that the fund mgrs receive.

Let’s say that you have a $10m fund and the fund returns $20m. The first $10m is returned to investors to make them whole. The remaining $10m is the profit

6) So the profit sharing on the $10m profit is split 80% ($8m) for the investors and 20% ($2m) for the fund mgrs.

$2m - cool! But that gets split now across 3 partners in this example. So ~$670k each. And for 10 yrs of work. So it’s like a $67k bonus every yr of the fund.

7) $67k bonus per yr is nice but honestly there are so many other industries where you get paid much higher bonuses: engr, PM, sales, finance, etc…

8) So but what about if you generate higher than 2x fund returns?

Well let’s say you do a 10x fund. Woot! Your investors are super happy!

But do YOU as the fund mgr make money?

9) So, you turn $10m -> $100m. Return the first $10m to investors. Split the remaining $90m.

20% * $90m = $18m. Split across 3 partners -> $6m.

For 10 yrs of work -> $600k per yr bonus equivalent.

10) A 10x fund is a top-top fund and $600k per yr bonus is FANTASTIC.

But again many sr level ppl at Google make that as a bonus yearly. There are easier ways to make this level of money compared to being a top fund mgr.

11) So finally, let’s take the fund multiple to a 100x fund - that’s when you REALLY make money as a microfund.

If you can do that, you join the ranks of @sacca @garrytan @alexisohanian @ycombinator and maybe a handful of other newer fund mgrs of 1000s who try every yr.

12) Contrast all this w running a $1b fund. Say you only 1.5x the fund. So you return $1.5b.

The first $1b gets returned to investors. The remaining $500m gets split amongst 3 partners -> $167m each or $16.7m bonus per yr! Woot!

13) So in short, as a microfund mgr most ppl:

-don’t make a good salary
-won’t make a lot in profit even if you return a great multiple to your investors because the fund size is small

Basically you won’t really make money even if you do well. 🤷🏻‍♀️

14) In contrast, if you’re at a larger fund, your salary is way better and any small multiple you return yields a big paycheck because you have so much money deployed.

15) So as you can see, microfund VCs aren’t in this business for the money.

They’re in it for one of 2 reasons:

A) they are using it to step up to become a big fund

B) OR if they stay small, they do it because they love startups & ironically don’t care about the money

I stand corrected here - forgot to split 20/80 but you get the gist…

$100m -> $33m per person -> $3.3m per yr is still great

https://twitter.com/jordanwappler/status/1410816260267380737