I have lately observed a strange dynamic in the start-up/private equity community that a buyout friend of mine coined: “the circle of envy”. It harkens to the old saying, “the grass is always greener on the other side” (a very capitalistic and classically “American” saying, which actually has its origins in Erasmus’ 16th century Latin writings, admiring the fertile look of a neighbor’s corn!). It goes something like this:
Entrepreneurs are recently famous for sulkily observing that the VCs have the cushiest of lives. Unlike entrepreneurs who live and die by quarterly and annual milestones, VCs get paid generous management fees whether they seem to actually perform or not. In the mind of many entrepreneurs, VCs don’t work all that hard, parachute into board meetings without having done their homework, make a few trite, unhelpful comments and then leave. In short, entrepreneurs are envious of the VC way of life, which seems to have lots of financial upside and none of the quality of life downside.
VCs are recently famous for grousing about how much money their private equity cousins are making. A VC struggles to invest $5-10 million at a time while their private equity cousins pour hundreds of millions of dollars, and recently even billions, into a single deal. Since the fee income portion of compensation is a function of assets under management, the more you manage, the more you make. The other compensation component is the carried interest, and VCs are green with envy when they see buyout guys use cheap leverage to make money while retaining large stakes in their firms. In short, VCs see the outrageous financial lifestyles of the private equity hitters, flying around in their private jets and think: “if only I could be like them – they’ve really got the model figured out”.
Private equity executives are recently famous for expressing their envy for hedge funds. Unlike private equity and VC firms, who only get paid on the gains when a portfolio company is liquidated, hedge funds take their carried interest off the table every year. And when a private equity or VC firm gets hot, it has to wait three or four years in between fund cycles to raise new, larger funds. Those lucky hedge fund executives can sweep big money in at a moment’s notice, raising their fee income with a snap. Further, complain private equity folks, the hedge fund executives rarely travel to chase around high-stakes auctions and have none of the responsibility or liability that “owning” companies and controlling boards represents. They just seem to coast along, accumulate more and more capital, and live it up.
And hedge fund executives? The top of the heap? Hardly. I often hear them discuss with envy the life of the entrepreneur – cycling through exciting new start-ups every 5-6 years and then taking long sabbaticals in-between gigs. Meanwhile, the hedge fund executive is chained to every international market every minute of the day for fear they miss spotting the latest currency or interest rate fluctuation. Entrepreneurs actually create things of value and leave a mark on society, rather than simply financial engineering. And that nonsense about money flowing in so fast being such a great thing? Remember, it can flow out just as fast. And, besides, the hedge fund business as a whole has little barriers to entry and struggle to find true proprietary elements of the busines, resulting in too much money chasing too few good investment opportunities. Those entrepreneurs who can come up with original ideas, build proprietary technology and products, and then sell them out get all the glory, reap all the rewards and then unplug. Now that’s the life.
The result of all this hand-wringing? Perhaps the Chinese proverb is the truest: “think about the misfortune of others to be satisfied with your own lot”. Of course, relative to others in this world, each of these executives is as lucky as lucky can be!