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Comment by patio11 | Hacker News Reader

VCs invest money from so-called limited partners: universities, pension funds, wealthy families, etc. They're partners in the VC firm by dint of providing money, but they don't get operational control of deals.

The fee structure of a VC firm is similar to that of a hedge fund: they take a management fee (based on the committed fund size) and a performance fee (based on the profits, if any, from investing). Typical numbers are 2% annually and 20%, respectively.

If a VC fund invests $100 million in a company and, after four years, the company goes kablooey, that actually cost the LPs about $110 million or so. The VCs made $10 million.

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Of course, and I did know that had I been thinking straight, but I don't think it detracts from the point I was trying (badly) to make.

Obviously advice from a VC is given selfishly, as you doing well means he does well, but for them to do well (i.e. get the performance fee), that will mean that you have done well too.

A VCs risk profile does not look like yours, due to the fact that they're diversified and you're not. Imagine your company is doing well and there are two ways to proceed:

option 1: your company can be sold today for $75m.

option 2: you can try for $1,000m or zero, with an 85% chance that you'll fail.

The VC is likely to prefer option 2, whereas if you aren't already rich, you'd likely prefer option 1.

Many a VC funded company has died because the VCs needed you to make a ton of money very quickly, or die trying, in order for their model to work. When considering VC investment, one really needs to be certain that their business needs align closely with your own (and are likely to continue in alignment) if you want to avoid heartbreak.

True but maybe not so significant. Without hits the VC can't raise the next fund. Fees are real but I'm not sure they drive model or the viewpoint.

IMO the larger divergence of interest is investment of time. Financial risks can be diversified or hedged, but there is no protection against lost time.

Don't be so sure. In a down economy, with a large fund, the fees can be so large as to be demotivating. What's 2% of a billion dollars? A fuckton by my standards.

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