The New Yorker:
Venture funds were growing yet most venture capitalists didn’t have skin in the game: only one per cent of the money in a V.C. firm’s kitty might come from its partners. Mulcahy discovered that it was a bad deal for investors.
It is worrying the number of VC funds out there investing other people’s money, with the partners risking little or none of their own money. Couple of problems with this model. One, the partners of the fund are incentivised by the two percent management fee they charge to go out and raise as much money as possible. Wouldn’t the time spent fundraising be put to better use looking for great founders and startups? Two, VC partners may make investments that they wouldn’t have made if they were putting their own money at risk (head I win, tails you lose).
At 8 Capita, we call our setup an investment partnership as opposed to a VC. It’s mostly the partners’ money, so we spend more time listening to startup pitches than pitching investors to put money with us. We think that is the way it should be.
p.s. If you’re curious about what goes on in San Francisco/Silicon Valley, read this fantastic New Yorker article.