I got thinking about that this morning in reading Brad Feld’s post about recycling management fees, something we do aggressively at USV (we have recycled between 20 and 25% of our mature VC funds).
We have never charged a premium carry or off-market management fee, we return all capital before taking carry distributions, and we recycle aggressively.
Certainly, we could charge more, but we have never wanted to do that.
When people ask me why not, I like to tell a story.
When Brad Burnham and I were raising the first USV fund, into the teeth of the VC and Internet meltdown of the early 2000s, we visited one of the top VC LPs in the world and he told us the story of a VC firm that they had been investing with for more than twenty years.
As the Internet bubble neared its pinnacle in late 1999, that firm came to the LP and told them that they were raising the carry from 20% to 30%. The LP, who had been supporting this firm for twenty years, was not comfortable with this hike in carry, but held their nose and went along with it.
Three years later, the firm came back for another fund, this time with a 1999 vintage fund in shambles.
They started out the pitch like this “we have had a wonderful and profitable relationship with you for twenty-three years.”
To which the LP retorted “Not really. We had a wonderful relationship with you for twenty years, then you reset the relationship and it has sucked ever since.”
That was the end of that LP/VC relationship.
That story has really stuck with me. Every time I think “we are well below market” I then think “but this is no time to upset the apple cart.” And I get back to work.
The same is true of entrepreneurs and VCs. You can push things too far and if you then stumble, it will come back to haunt you.
But if you are fair and reasonable, it will get paid back over time, particularly in times when you are struggling and need more capital.
That is how the world works. What goes around comes around. Best to be in good standing with your investors when it does.