No less than the president and the CEO of the noted Kaufman Foundation, the $1.8 billion endowment fund that promotes entrepreneurship, are saying that the current VC model is broken.
In an article in Business Week, Carl Schramm and Harold Bradley say the prominence of American venture capital has taken a tumble from its heyday in 2000. The industry that spawned such successes as Apple, Cisco, Google and Microsoft, only invested $4.8 billion into 637 companies in 2009 (and that’s down 33 percent from 2008).
Schramm and Bradley believe the “2 and 20″ formula (2 percent of annual management fees and 20 percent of profits on exit) is to blame. The formula worked well two decades ago, when most VC investors were wealthy individuals with “patient capital,” who were willing to wait 10 years for a start-up to blossom. But in the past decade, more and more institutional money has flooded into the VC industry. These big corporate and public pension fund investors are willing to commit huge chunks of money on the same 2 and 20 terms. But the higher capital volumes generate sizeable management fees for VC funds, which encourages VCs to focus more on raising funds than on nurturing start-ups along the long road to success.
And since institutional investors are under pressure to show short-term returns, VC funds started “flipping” their start-ups after just a few years, to create quick payoffs.
Schramm and Bradley believe that forcing VC funds to hold onto their best portfolio companies longer … and forcing them to put more of their own “skin” in the game, in terms of partnership money, would help. The full article is worth reading at BusinessWeek.
If you are fortunate enough to receive an offer for a private equity or venture capital job, never accept it on the spot. Instead, politely thank them for the offer, express your enthusiasm for the job and their firm, and ask to think it over for a few days. Try to buy at least a week to evaluate the offer and build your case for more.
This gives you time to build a case for your compensation package. You might mention specific skills that you’ve acquired, high profile or unusual deals you’ve worked on (M&A, IPOs, Convertibles, etc.), and the key skills you gained working on these deals (such as modeling, valuation, and others). In the case of a venture capital job, you need to demonstrate your ability to contribute to the firm, your passion for a particular industry, or the entrepreneurial culture overall. If you’ve started a business, worked on any deals, even part-time, or done any research for a local start-up or angel investor, you can build a strong case for a higher salary range.
Remember, a good firm is seeking high quality professionals who are able to deliver value. Never be afraid to ask for something. Employers are prepared to negotiate, and often feel more comfortable hiring someone who knows his or her professional worth. If you are as good as you say, they expect you to negotiate and are waiting for your counteroffers.
It also helps to negotiate from a position of strength. Knowledge about the market and compensation for similar jobs is one way. If you have more than one offer at the same time this obviously gives you a better bargaining position. You are able to mention that you are comparing compensation plans from both. Of course, this must be done diplomatically. You may want to indicate that you would prefer to work for their firm if they could match the compensation offer provided by another.
Finally, get the final arrangement in writing. Follow up your meeting with a letter thanking them again for the offer, mention when you’ll be starting, and outline both the salary and other compensation details that you have ironed out verbally.
Negotiating your complete compensation package sets the tone for your relationship with the company for years to come. How you handle this delicate task establishes how much respect they have for your abilities now, and the next time a compensation discussion comes up in the not-too-distant future.
References:
www.computerworld.com
www.bankrate.com
Now you can practically calculate the ROI for that advanced degree. MBAs in private equity on average were earning $16,000 more than non-MBA’s, according to the 2008 Job Search Digest Private Equity Compensation Survey.
Although an MBA is not always required in private equity and VC careers, over half of the respondents have an MBA and our private equity jobs database indicates that many open positions still request (and sometimes require) an MBA. Perhaps the most important finding on the MBA front is that over 70 percent of Partners have an MBA.
As for compensation, the annual take-home for MBAs in private equity averaged $262,838, including bonus versus $246,793 for non-MBAs. This was slightly higher than the annual compensation for MBAs in hedge funds, which averaged $255,303 including bonus.
Visit JobSearchDigest.com to read the Executive Summary of the 2008 Private Equity Jobs Digest Compensation Survey.
