"I’ve been in the venture business over 10 years and still haven’t received a carry check," complained a VC buddy to me the other day.  I was so stunned by this comment that I decided to conduct an informal survey and discovered that many of the 30 and 40 something VCs who have been in the business 6-10 years find themselves in a similar predicament.  Now I admit that a VC whining about lack of carry may sound tiresome to an entrepreneur, but it’s a phenomenon worthy of some consideration nonetheless, as how VCs get paid underline their motivation – and has been a driver for much of the VC personnel movement in the last few years.

Some context is required to understand the "inside baseball" concept of carry, or carried interest.  The carried interest is the percentage of profits that a fund earns as a performance incentive – it’s a concept that applies to venture firms, buyout funds, real estate and hedge funds alike, among others.  The typical carried interest ranges from 20-25%, although some firms are able to get as high as 30%.

For example, if a $200M fund that has a 20% carry returns 3x, or $600M, it would generate $80M in carry for its general partners – a handsome sum to earn over the ten year fund life.  But here’s the rub:  the carry is often paid out after the original capital has been returned.  And if the capital isn’t returned, there is no carry.  Further, some funds have inflation-adjustments or minimal return hurdles.  So a fund that returns only 5% per year over 10 years, or $326M for a $200M fund, may get no carry.

Now let’s examine what has happened to folks who have been in the business for the last 10 years.  Let’s say you joined a VC fund as a principal sometime in 1996-1998 when VCs were rapidly expanding and hiring young investment professionals like crazy.  The funds that began during that period had spectacular performance (one fund I know returned 15x on a $100m 1997 fund, yielding an extraordinary $280M in carry for its 4 general partners!).  Unfortunately, as a principal, you didn’t get any of the carry, you were simply paid a salary while the senior general partners took the carry.

But in 2000-2002, after a brief apprenticeship period, you "made it" and became a general partner.  The problem?  Fund sizes swelled to $600M – $1B during that period, the market crashed, and very few of those funds returned capital, never mind posted large enough gains to generate significant carry.  The senior partners siphoned off the excess management fees, leaving the junior partners with comfortable, but not exhorbitant, salaries and no carry.

The new funds that were raised in the "post-crash" era of 2003-2006 have promise, but because of elongated exit time frames, and the fact that many limited partners negotiated tighter terms on the timing of carry distributions, general partners may have to wait until 2008-2010 to receive their first carry checks.

The net result?  It’s not as uncommon as you think for fairly senior general partners, with 10 years of experience, to have never received a carry check.  And if they’re only working for salary, then another VC fund that offers them a bigger salary can poach them away.  An old VC hand once quipped to me that VC was a "get rich slow" business.  For partners who have been hanging around for a while waiting for their golden moment, this must sound painfully true.