The word from Warren
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.