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Having capital to invest in more start-ups reduces risks and increases the chances of the VC earning bigger returns. In order to invest in more start-ups, the firm needs top-notch people (partners, associates, etc.).

1. The best people are not going to join a firm that's giving away 50% of their management fees and carried interest income.

2. Not enough people & capital means

-Less investments, therefore more risks and less return.

-Less due diligence and monitoring of portfolio companies (again more risks)

-investors hate risk and low returns




> Having capital to invest in more start-ups reduces risks and increases the chances of the VC earning bigger returns.

That's true up to a point, but only up to a point. You hit the point of diminishing returns pretty early. I wish it were otherwise but there's 40+ years of history that support that theory.

It's not even that there aren't enough potentially great startups. It's that the venture business is a business that scales mostly with people. Each GP can credibly be a primary investor and board member in maybe 10-12 companies at a time. I don't think arbitrarily taking that number up to 20-24 would generate twice the returns, at least without the GP's head exploding in the process.


>It's that the venture business is a business that scales mostly with people.

I agree which is why I brought up the topic of management fees and carry. You need them both to pay for additional people in order to scale your business. (which you addressed in your other comment).


> 1. The best people are not going to join a firm that's giving away 50% of their management fees and carried interest income.

True, but that's not what we're saying. We're saying that the GPs as individuals are going to do that, for the income we would have received in any event. This doesn't affect how the firm allocates fees and carry, and doesn't reduce the incentive for anyone to join the firm who would have joined before.


Thanks for the clarification.




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