In this video, I talk about the three ways for how a venture capitalist creates money and earns money. Number one, the management fee, which is used to pay for staff salary and expenses. Number two, Carry, which is the long term success fee that incentivizes venture capitalists to do an outstanding job and be diligent with the money. And then number three GP commitment, which is the venture capitalists’ own investment into his fund, where he gets to keep all the profits.
Hello, everyone, I recently asked you for help and to submit questions so that it will become more clear to me what is transparent already what’s already known and what are the things that you would like to know.
And one question that was submitted as an important one, how does a venture capitalist make money? That’s the question I want to answer today. In essence, there are three ways for venture capitalists to make money․ Number one, management fees, number two carry, and then number three GP commitment.
Management fee
To talk about the first one management fee. The management fee is basically what the investors in the fund pay the GP or the venture capitalists in order to run their operation. So typically, this is a percentage of what they invest. A usual percentage could be 2% annually that they paid to the venture capitalists management company, which they then use to pay staff to pay for expenses and so on and so forth.
Carry
Number two, carry. Once the fund is fully invested and then divested and has created some profits, not all of these profits are being paid back to the investors. Typically a venture capitalist gets to keep about 20% of the profits and that 20% is called the carry. This is also what incentivizes the venture capitalists to do a really good job with their clients’ money to be extremely diligent and look for great returns for their investors’ money.
GP commitment
And then number three, the GP commitment. In order for venture capitalists to raise funds, they often need to commit significant funds of their own into the fund, and that’s called the GP commitment. Now, of course, once the fund is invested, and then profits are generated, the profits are also generated on that GP commitment. And because it’s their own money that venture capitalists get to keep 100% of those profits.
So there you have it, three ways for how a venture capitalist creates money and earns money. Number one, the management fee, which is used to pay for staff salary and expenses. Number two, Carry, which is the long term success fee that incentivizes venture capitalists to do a really good job and be diligent with the money. And then number three GP commitment, which is the venture capitalists’ own investment into his fund, where he gets to keep all the profits.
I hope it’s helpful. If there are any more questions around compensation, please let me know in the comments. And with that, have a beautiful day. Stay curious. I’ll talk to you soon.