To Christopher Gabrieli, a general partner at Bessemer Venture Partners, the income of venture capitalists is an interesting, but sensitive, subject. He says his firm has always believed in a flat compensation structure, but he won’t spell out Bessemer’s exact division of the spoils.
Venture capitalists, like almost everyone else, are curious to know how well their competitors are getting paid, but they often keep mum when it comes to revealing specifics about their own incomes.
“I would say it’s probably akin to locker room discussion about sex,” Gabrieli observes. No one wants to make claims so outrageous that they are obviously false, but at the same time, no one wants to sound less successful than the next guy.
Junior members of the venture capital community are benefiting from an ongoing trend of higher pay for those in the lower rungs. And for another consecutive year, lower-level VCs have been getting raises while more senior members are losing ground (VCJ, December 1998, page 41), according to William M. Mercer Inc. Performance & Rewards Consulting, which at press time was nearing the release of its annual compensation survey of private equity firms, which gives VCs a benchmark to gauge their pay.
Junior partners saw their average total pay increase by 26% and associates got a 19% hike this year from 1998, according to Mercer’s “1999 Compensation Survey Conducted for Venture Capital and Other Private Equity Firms.” Mid-level partners also benefited, with 14% pay increases, as did analysts, whose average pay rose 24%.
But the big winners remain senior associates, with their incomes – salary plus bonus plus carry and other “long term incentives” – shooting up an average of 52% in 1999 from the year before, said Mercer Principal Michael Holt.
About 65 firms, mostly venture firms and some buyout groups, took part in the survey.
Salaries Slide for Top Posts
In 1999, the upper echelons of the venture world saw their incomes decrease. The total pay for managing general partners on average decreased by 35% in 1999 from the year before, and senior partners (known in previous surveys as “managing partners”) lost 6%. However, the declines must be viewed with 1997’s dramatic pay gains in mind, a time when all levels of venture professionals saw their salaries jump, especially at the mid-level partner rank and above. The average salary for managing general partners from 1996 to 1997 soared by 138% and by 88% for senior partners, for example. Pay declined 17% for managing general partners and 7.8% for senior partners from 1997 to 1998.
This year’s decline in income for the two highest VC posts chips away at 1997’s extraordinary gains, but the losses still leave top-level VCs well above the poverty line.
The median income, including bonus and carry, for a managing general director is $1.167 million this year, while the median salary for a senior partner is $1.084 million.
Salaries drop considerably from there, with mid-level partners earning $402,000 in 1999 and junior partners earning $220,000, according to Mercer. The median total income for senior associates is $146,000, while the median associate’s pay is $91,000, and an analyst’s take is $68,000.
Mercer found that 9% of associates are eligible to receive some cut of their firms’ carried interest split this year, as are 36% of senior associates. More than half – 57% – of junior partners are eligible to share in their firms’ carry, and even 24% of administrative managers are eligible to share in their firms’ profits.
Junior investment professionals are the beneficiaries of a tight labor market, especially in the venture arena, where firms must compete with each other and with high-technology companies for young talent. And with the increasing size of venture funds – a total of $24.34 billion was raised in 1998 – venture firms need more people to manage their investment vehicles, thus adding fuel to the recruitment fire.
Of course, bigger funds mean more carry dollars to spread around at successful firms. Additionally, with carries going up to 25% – and in some cases even 30% – and management fees holding steady between 2% and 2.5%, there is enough money to pay attractive salaries and to offer small pieces of carry to less experienced investment professionals without penalizing senior VCs.
Spreading the Wealth
Battery Ventures Founding General Partner Bob Barrett expects the trend to continue. His firm gives carry to its administrative assistants and lets associates, senior associates and principals participate in the firm’s incentive program. Essentially, they get to participate in the profits on a deal-by-deal basis as a reward for originating or working on deals.
Los Angeles’s Zone Ventures gives associates a small piece of the carry when they join the firm. “I want them working full bore from the day they come in,” says Managing Director Frank Creer, who declines to reveal the exact size of an associate’s take. He did say, however, that at one point the firm had two associates who, combined, were getting less than 5% of the total carry.
Technology Crossover Ventures, too, spreads profits around, assigning pieces of carry to all investment professionals and office assistants. TCV tries to keep its staff happy to stave off offers from competing firms trying to poach TCV’s staff, said General Partner Jay Hoag.
Even before a bonus or carry is added, venture capitalists’ salaries are well above the national norm. The median salary for an analyst – the lowest member of the venture capital food chain – is $49,000 this year. By comparison, the average per capita income in the United States was $20,120 last year, according to U.S. Census Bureau data released in late September. That means the median managing general partner’s salary, not including bonus and carry is $312,000 this year, or 15-and-a-half times last year’s average American income. A median junior partner’s salary in 1999 is $100,000, according to Mercer, almost five times this nation’s average income in 1998.
According to the Congressional Budget Office, which, unlike the Census Bureau, includes capital gains in its income figures, the average pre-tax family income in 1995 dollars is expected to be $49,500 in 1999. The average pre-tax income for families in the top 10% is projected to be $188,000, and the top 1% of families’ average pretax income is expected to be $719,000, again in 1995 dollars. Clearly, VCs – especially those who are more senior – are among the wealthiest American workers.
The $20,120 Question
Nevertheless, venture capitalists often assert they aren’t in it for the money. But would they keep their jobs if their incomes were $20,120 or even $40,000?
TCV’s Hoag said he would work in venture capital for less money, although he found the $20,000 question unanswerable.
Asked if he would stay in VC for about $40,000 a year – after making enough money in prior years to be “set” – Zone’s Creer notes that his answer would depend partly on the definition of being “set.” Nevertheless, Creer volunteered that if he had to choose between being a janitor, selling clothes at a Nordstrom department store or being a venture capitalist, he’d remain a VC.
Battery’s Barrett has a different view. “I’m having a good time,” he acknowledges. “I’m having fun. I’m not working for the money anymore.” But the money is a common denominator, a way of keeping score. The hours are long, he observes, and he wants to be rewarded for putting in lengthy days. Barrett says he would not remain a VC for an annual salary of $20,000. In fact, he doesn’t think he’d do it for half his current income, either.
Barrett likes earning a substantial income, having control over that money and being able to do with it as he pleases, even if it means giving it away. If he were going to do something purely for fun, it would be golf, not venture capital, he says.
Doug Breckel, a senior associate treasurer for the University of Washington who oversees the school endowment’s private equity investments, shifts back and forth in the way he views the incomes of VCs.
Looking at the lofty returns venture capitalists have sent back to their limited partners in recent years, he thinks VCs are worth their pay. But in a more general sense, he is concerned about the polarity between the “haves” and the “have nots.”
Breckel wonders how limited partners would respond if the market suddenly dropped. Would they feel taken advantage of by fees and escalating carries of the last few years? And how would L.P.s feel about the “customer service” they’d received from general partners during the boom time? Breckel wonders whether limited partners would keep backing venture capitalists if capital got scarce. That would be the proof in the VC pudding, he says.
As an L.P., Breckel concludes that if at the end of the day the general partners are doing what they said they would, he can’t complain about them being overly enriched.
It doesn’t bother Pantheon Ventures Inc.’s Managing Director Jay Pierrepont, either. His advisory funds-of-funds management firm looks at how the carry is doled out within a VC firm, hoping to see an arrangement that rewards good performance to keep the rainmakers around.
Investors always have to wonder about the motivation of successful venture capitalists who already have amassed personal fortunes, but Pierrepont sees a lot of very wealthy VCs who remain extremely motivated “even with a fleet of Ferraris in their garage.”
Of course, he is thankful for the VCs’ success, which contributes directly to his own organization’s success. Top venture capitalists have been at the forefront of technological revolutions built around the personal computer, software and Internet, and they’ve generated enormous wealth both for the limited partners and for themselves, he says.
Capitalism’s Best Face
Carrying that idea further, Bessemer’s Gabrieli points out that venture capital is not a zero sum game. “It’s the best face of capitalism, the willingness of the private sector to take risk … no one else is willing to take in pursuit of innovation.”
VCs’ total salaries should not be compared to – or lumped in with – the pay of chief executives, he says.
“There’s no question that when you look at venture capital, it puts the kind of fact of capitalism squarely in your face,” Gabrieli says. “And remember: what CEOs make is not a function of capitalism … it’s very different. What we make is a function of capital. We put money into companies, and we share in the return on that money.”
On one hand, observers could look at the venture capital business and wonder why more than a half of a young company’s shares go to the limited partners who did little more than write a check to the venture capitalists. Another 15% or so of the company goes to the venture capitalists themselves, and only about 20% goes to the people who made it all happen within the company. That, however, is the wrong way to look at the situation, Gabrieli says.
Wealth – and jobs – in venture capital are generated by the availability of capital, courtesy of the L.P.s. Therefore, in Gabrieli’s opinion, the key issue is not how the pie gets cut, but how much venture capital can help the pie grow.
All that said, not everyone is comfortable with the divergence in income between the highest paid Americans and other workers, regardless of the good that might be generated by those at the top.
Scott Klinger is the co-director of Responsible Wealth, a project of United for a Fair Economy, a Boston-based group that seeks public policy changes to narrow the wage gap between workers. Responsible Wealth is a group of Americans drawn from the top 5% income earners and asset holders. They support, among other policies, a more progressive tax system and a higher minimum wage.
Formed in late 1996, Responsible Wealth has about 450 members, Klinger says. Some have signed a pledge to “refuse” the 8% capital gains tax cut legislated in 1997, agreeing to donate the money to groups working on economic equality issues. Members also commit to paying their own employees a working wage, and those who own stock in other companies are asked to sponsor shareholder resolutions to change corporate practices to help workers.
Responsible Wealth members are not motivated by guilt about having money, but by the idea that wealth is a tool, Klinger says. Battery’s Barrett views wealth in a similar way, donating “a fair amount” to schools and to think-tanks, and he’s considering forming an education-focused foundation. Beyond that, however, he does not feel an obligation to society or philanthropy. Barrett gives because he thinks it’s fun, “but I don’t do it because I think I have a responsibility.”
Like Gabrieli, Barrett notes that venture capitalists, by virtue of their work, contribute jobs to the economy through their portfolio companies. “By doing your job, it’s certainly a positive benefit to everybody.”
1999 Private Equity Compensation Survey
Median Compensation ($000’s)
Eligible for Salary Plus Salary Bonus Carry at Work
Position Carry Salary Bonus & LTI* % $mm
1. Managing General Partner (73) 100% $312 $600 $1,167 3.8% $14.1
2. Senior Partner (117) 86% $210 $551 $1,084 2.5% $8.9
3. Mid-level Partner (131) 74% $150 $335 $402 1.8% $3.6
4. Junior Partner (85) 57% $100 $198 $220 0.5% $1.1
5. Senior Associate (70) 36% $89 $145 $146 0.3% $0.5
6. Associate (68) 9% $70 $88 $91 0.3% $0.1
7. Analyst (73) 0% $49 $68 $68 0.0% $0.0
8. CFO (37) 81% $150 $225 $355 0.5% $1.9
9. Controller (30) 20% $77 $88 $93 0.2% $0.7
10. Administrative Manager (21) 24% $56 $60 $60 0.2% $0.6
* LTI – Long Term Incentives Source: William M. Mercer Inc.