
Venture capitalists can earn significant amounts of money, with some top performers bringing in tens of millions of dollars per year.
According to one study, the top 10 venture capital firms in the US generate an average of $1.4 billion in revenue annually. This revenue is typically split among the firm's partners, with the top performers taking home a larger share.
A typical venture capital firm has around 10-20 partners, each of whom can earn upwards of $10 million per year. This can add up quickly, with some firms generating hundreds of millions of dollars in partner compensation each year.
What They Do
In venture capital, the roles are quite distinct. Venture Capital Analysts do a lot of number crunching, industry research, and support work, such as helping Associates with due diligence and internal processes.
Most Analysts leave within a few years to join a portfolio company, complete an MBA, or move to a different firm as an Associate. Some Analysts do get promoted internally to the Associate level, but it's less common than the equivalent investment banking promotion.
The normal range for a Venture Capital Analyst's total compensation is $60K to $100K.
Venture Capital Partners come in different levels, with Junior Partners being in between Principals and General Partners in terms of responsibilities and compensation.
Junior Partners are less involved with deal execution than Principals, but not quite as hands-off as the General Partners. They're more involved with Boards, portfolio companies, and LPs, but not quite as much as the General Partners.
General Partners have had successful track records as entrepreneurs or executives, or they've been in a venture capital career for a long time and have been promoted to this level. They don't need to find the next Google or Facebook to get here; a record of "solid base hits" could suffice.
Here's a rough breakdown of the different roles and their typical compensation ranges:
Pros and Cons of Being a VC
Being a VC can be a dream job for many, but it's essential to weigh the pros and cons before deciding if it's right for you.
You'll do interesting work, meeting smart entrepreneurs and investors, and have a better work-life balance compared to IB, PE, or HF jobs. VC jobs also offer high salaries and bonuses at all levels, relative to most "normal jobs."
Here are some benefits of being a VC:
- You do interesting work and get to meet smart, motivated entrepreneurs and investors.
- VC jobs offer much better work/life balance than IB, PE, or HF jobs.
- You earn high salaries and bonuses at all levels.
- You do something useful for the world in venture capital.
- The industry is unlikely to be disrupted.
However, the career path can be unpredictable, with promotion time ranging from 2-3 years, and carry in venture capital careers is very "lumpy" compared to private equity roles.
The Career Path
The career path in venture capital is a bit unconventional, and it's not as standardized as you might find in other industries. The structure of venture capital firms varies a lot, so the titles and levels are less standardized.
One thing that's consistent is the hierarchy of roles, which typically looks like this:
- Analyst – Number Cruncher and Research Monkey.
- Pre-MBA Associate – Sourcing, Deal, and Portfolio Monkey.
- Post-MBA or Senior Associate – Apprentice to Principals and Partners.
- Principal or VP – Partner in Training.
- Partner or Junior Partner – General Partner in Training.
- Senior Partner or General Partner – Decision Maker and Firm Representative.
Keep in mind that some firms combine or split certain roles, and some have more or fewer levels.
Pros and Cons
As a venture capital career can be a great fit for some, it's essential to weigh the pros and cons. Here are some key points to consider:
You'll have the opportunity to do interesting work and meet smart, motivated entrepreneurs and investors, unlike in traditional finance fields where you might be stuck revising pitch books or fixing font sizes.
VC jobs offer a much better work-life balance compared to IB, PE, or HF jobs, with fewer last-minute fire drills for deals.
You'll earn high salaries and bonuses at all levels, relative to most "normal jobs".
The industry is unlikely to be disrupted because it's based on human relationships, and it takes years or decades to assess investment performance.
However, it's worth noting that the industry's stability can also mean that it may not be as dynamic or fast-paced as other fields.
How VCs Make Money
Venture capitalists typically earn a 2% management fee on the funds they manage, which is a standard industry practice.
This fee is usually deducted from the fund's assets every quarter, providing a steady stream of income for the VCs.
VCs also earn a carry, or a percentage of the profits made by the fund, which can range from 10% to 30% depending on the fund's performance.
The carry is calculated after the fund's expenses, including the management fee, have been deducted.
As an example, if a fund earns a 20% return and the management fee is 2%, the VCs would earn a 16% carry.
VC Fund Structure and Economics
The traditional 2/20 rule is the industry standard for VC compensation, where GPs receive a 2% management fee on the total assets under management and a 20% carried interest on profits beyond a specified return threshold.
Management fees serve as the operational backbone for VC funds, covering day-to-day expenses and allowing GPs to scout, invest in, and support promising startups, typically set at around 2% of the fund's AUM.
The management fee has a direct impact on the net returns generated by the fund, reducing the amount of capital available for investment in portfolio companies.
Even VC's don't get free money, as the management fee is paid out of the fund's assets and impacts the hurdle rate to get to the carried interest.
Carried interest represents potential future profits contingent on the fund's success, and the balance between fees and carry is a fundamental debate in VC compensation.
The 2/20 structure is widely regarded as the standard in Venture Capital compensation, but there's significant variability based on fund size, strategy, and negotiation dynamics, such as the 3% and 30% fee structure or the 1/10 structure for Lead Investors.
Carried Interest and Fees
Carried interest, or "carry", is a critical part of the Venture Capital compensation package and the primary source of potential wealth for Venture Capitalists. It's a performance-based compensation that rewards GPs for generating returns that exceed the fund's hurdle rate.
The carried interest rate is typically 20% of the fund's capital gains, as seen in Example 4. This means that if a fund generates $200 million in capital gains, the GP would be entitled to 20% of that, or $40 million.
Management fees, on the other hand, have a direct impact on the net returns generated by the fund. They're paid out of the fund's assets and reduce the amount of capital available for investment in portfolio companies.
The 2% management fee is not "free" money, as it affects the hurdle rate and the carry calculation. In Example 1, a $100M fund with a 2% management fee would have $15M in management fees over 10 years, reducing the amount of capital available for investment.
The "2/20 rule" is an industry-standard compensation structure where GPs receive a 2% management fee on the total assets under management (AUM) and a 20% carried interest on the profits generated by the fund beyond a specified return threshold, as mentioned in Example 7.
While the 2/20 structure is widely regarded as the standard in Venture Capital compensation, there's significant variability based on fund size, strategy, and negotiation dynamics. Emerging managers, for example, might opt for a structure emphasizing carried interest over management fees.
Here's a breakdown of the fees and carry calculation:
- Total Committed Capital: $100 million
- Total Exit Proceeds: $300 million
- Carried Interest Rate: 20%
- Hurdle Rate: 8%, cleared
- Capital Gains: $200 million
- Carried Interest: $40 million (20% of $200 million)
This calculation illustrates how carried interest is based on the fund's capital gains, not the committed capital.
VC Fund Performance and Compensation
VC fund performance and compensation are intricately linked, with the compensation structure directly influencing the fund's performance.
The 2/20 rule is an industry-standard compensation structure where GPs receive a 2% management fee on the total assets under management (AUM) and a 20% carried interest (or "carry") on the profits generated by the fund beyond a specified return threshold.
Management fees are collected by the operating company responsible for the fund's management and are debited from the capital calls, usually every quarter, to cover substantial costs such as salaries, operational infrastructure, professional services, and annual gatherings.
However, the management fee has a direct impact on the net returns generated by the fund, reducing the amount of capital available for investment in portfolio companies. This means that the fund's overall returns will be lower than they would be if there were no management fee.
The 2% management fee can add up quickly, with a $100M fund generating $2M in management fees per year, or $20M over 10 years. This is a significant amount of money that could be invested in portfolio companies.
In contrast, carried interest is a share of the profits that GPs receive if the fund performs well, and is typically realized after several years. This incentivizes GPs to support and nurture their portfolio companies over time rather than seeking quick exits.
The balance between fees (management fees) and carry (carried interest) is a fundamental debate in VC compensation, with some arguing that fees provide immediate, predictable income to manage the fund, while carried interest represents potential future profits contingent on the fund's success.
A hypothetical scenario illustrates the impact of compounding management fees over time. If a manager oversees three funds of increasing size ($5 million, $20 million, and $50 million) and applies a declining fee structure, the total management fees across three funds would amount to approximately $1.5 million by Year 8.
Here's a breakdown of the total management fees collected over the 8-year period:
Unique Considerations for VC Firms
Venture Capital firms have a unique LP/GP structure, which is a fundamental aspect of their business model.
This structure means that VC firms rely on Limited Partners (LPs) for funding, who are typically institutional investors or high net worth individuals. The General Partners (GPs) are the ones responsible for making investment decisions and managing the fund.
The "2/20" compensation mechanism is a common practice in the industry, where GPs take a 2% management fee and 20% carry on the fund's profits. This means that if a VC firm invests in a successful startup and it exits with a significant profit, the GPs will take a substantial share of that profit.
This compensation mechanism can be a significant motivator for GPs to take calculated risks and make savvy investment decisions, as they have a direct financial stake in the fund's performance.
Other Considerations for VC Firms
Not every startup succeeds, so VC funds must balance the upside of successful companies with the losses of those that didn't do well.
Prestigious VC funds or small funds run by well-known venture capitalists might negotiate for higher management fees.
The 2/20 rule is widely regarded as the standard in Venture Capital compensation, but there's significant variability based on fund size, strategy, and negotiation dynamics.
Smaller funds might levy higher management fees, sometimes deviating from the traditional 2% to adequately cover operational expenses, given their smaller asset base.
Emerging managers may opt for a structure emphasizing carried interest over management fees, which incentivizes the creation of substantial value.
Lead Investors might negotiate a 1/10 structure, which can improve a deal's economics by charging co-Investors 1% management fee and 10% carried interest.
Small VC Funds: Unique Behaviors
Small VC funds are more focused on optimizing their investments, which means they're always looking for ways to make each portfolio company successful.
With a lower management fee, these funds must operate efficiently, often leading to a hands-on approach with their investments.
Their limited resources force them to be more strategic in their decision-making, choosing investments that have a higher potential for growth.
This focus on efficiency and effectiveness can lead to a more personalized relationship between the fund and the portfolio companies.
Math and Mechanics of VC
Venture capital firms make money through a high-risk, high-reward paradigm, where they invest in businesses with significant growth potential. Unlike conventional loans, venture capital is typically exchanged for equity in the company, giving VCs a stake in the business's success.
The funding process usually happens in stages, starting with pre-seed or seed funding for early development, followed by early-stage funding for operational startups, and finally, growth-stage funding for rapidly expanding companies. This staged approach allows VCs to assess the company's progress and adjust their investment strategy accordingly.
To reach their desired returns, venture capital firms need to achieve at least a 6x return on investment, considering that half of their portfolio may go out of business and return zero. This means founders should expect their investors to push for big wins, with large returns, which will benefit the VC firm through the carry.
Math for Founders
Venture returns are driven by outlier returns for a couple of reasons. Early-stage startups are very risky, and it's normal for half of a fund's investments to go out of business and return zero dollars.
If half of a fund's portfolio goes out of business, the other half needs to return at least 6x to make up the difference. This means that founders should expect their investors to not be happy unless their startup makes ten times or more the initial money that is invested.
Most top-tier funds have one or just a small handful of companies that return 50, 100 times their investment. These are the funds that limited partners dream of investing in.
Every firm is organized differently, but many firms judge each partner on their individual performance. This can lead to funny things happening as they push your startup to be the one that makes them money and keeps them in the investing game.
By understanding how venture capital firms make money, you'll have a better grasp of what they are looking for when selecting investments. Primarily, they're looking for big wins with large returns, which will benefit them through the carry.
Related reading: How to Make Money
The Mechanics of
Venture capital operates through a high-risk, high-reward paradigm. VCs invest in businesses they believe have the potential for significant growth and returns. Unlike conventional loans, venture capital is typically exchanged for equity in the company.
The funding process usually happens in stages, starting with pre-seed or seed funding for early development, followed by early-stage funding for operational startups, and finally, growth-stage funding for rapidly expanding companies. Early-stage startups are very risky, and it's normal for 1/2 of a fund's investments to go out of business and return zero dollars.
To make up for the losses, the other half needs to return at least 6x to break even. However, many companies that do exit will likely exit for about what the VC invested in the first place, meaning they don't contribute much to the fund's overall return.
Top-tier funds have one or just a small handful of companies that return 50, 100 times their investment. These are the funds that limited partners dream of investing in. Venture capital firms are looking for big wins, with large returns, which will benefit them through the carry.

Most VC funds follow the Limited Partner (LP)/General Partner (GP) model, a cornerstone shaping how VC funds operate and profit. LPs are the investors who provide the capital for the fund, while GPs are the Venture Capitalists who manage the investments.
The "2/20 rule" is an industry-standard compensation structure where GPs receive a 2% management fee on the total assets under management (AUM) and a 20% carried interest (or "carry") on the profits generated by the fund beyond a specified return threshold.
Sources
- https://mergersandinquisitions.com/venture-capital-careers/
- https://kruzeconsulting.com/blog/vc-make-money/
- https://kruzeconsulting.com/blog/two-and-twenty-vc-fee-structure/
- https://thevcfactory.com/venture-capital-compensation/
- https://rodrigo.medium.com/ask-a-vc-how-does-a-venture-fund-make-money-cf9cec4e14e2
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