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The word from Warren

Thanks to Brad Feld, here's a link to the Berkshire Hathaway 2006 Chairman's Letter.  It's a great read.  You'll learn something about business by the time you are done.

Note his indictment of the '2 and 20' crowd who don't deliver strong financial results.  Here's an excerpt:

In 2006, promises and fees hit new highs. A flood of money went from institutional investors to the 2-and-20 crowd. For those innocent of this arrangement, let me explain: It’s a lopsided system whereby 2% of your principal is paid each year to the manager even if he accomplishes nothing – or, for that matter, loses you a bundle – and, additionally, 20% of your profit is paid to him if he succeeds, even if his success is due simply to a rising tide. For example, a manager who achieves a gross return of 10% in a year will keep 3.6 percentage points – two points off the top plus 20% of the residual 8 points – leaving only 6.4 percentage points for his investors. On a $3 billion fund, this 6.4% net “performance” will deliver the manager a cool $108 million. He will receive this bonanza even though an index fund might have returned 15% to investors in the same period and charged them only a token fee.

 

This reinforces the point that the only type of investment in a fund with a 2% fee and 20% carry that makes sense is one with a high return.  The expanding size of VC funds will undoubtedly dilute these returns.  This confirms my thought that going early stage with a tight focus is the only viable long term VC strategy.

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