Investor Friendly Terms
At USV, we have always had simple and investor-friendly terms with the institutions and individuals that provide the capital we invest.
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.
I heard about crypto funds charging 3&30. I thought they pretty aggressive and when the music stops they’ll be the first to be dumped. Likely not having a great time right now explaining to their LPs where all their capital has gone .
The problem is in today’s world that is going to stick with you forever.
Yeah, the ones who charge 3&30 are likely gone forever. Crypto is a wild ride at the casino. Anyone who thinks they can win with certainty is delusional.
Doing good by doing right. Service as a service. I see theme continuity. 🙂
no one likes to feel that they are being taken advantage of – ‘investor *fair* terms’.
A wise man once told me that life is not a parade but rather a merry go round
I love it. See my comment.
Curious what the ratio is now between new LP’s that USV approaches vrs new LP’s that approach USV. And why.
we can’t take new LPs because we keep our fund sizes small
Excessive fees are a signal of lack of faith in your own and team’s talent. All markets ebb and flow but talent hopefully is consistent even when things head south.
amen, sir, amenas my late father liked to say: “The goal is to buy low and sell high, not buy lowest and sell highest.”
As Brad broke it down, the math is much better for everybody if you recycle.
Heard hedge funds fees were under big pressure. Underperforming asset class.
The longer you get to play, the better the game.You’ve modeled this for a long time, Fred.This is one of your top 5 posts of the year.
Agree, really great post. Makes one think about the applicability of this lesson in a lot of work contexts.
thanks Seth. it feels great to put out something really good
I think this and Brad’s post speaks to the authenticity and integrity of both Fred and Brad. The closer I get to the world of VC the more greed and opportunistic behaviour I see. It just makes me wonder, is it really so hard to do the right thing? Doing the right thing should be easy. In fact doing the right thing yields better outcomes in the long term! Yet still there are people who opt for the path with direct line of sight to money and fame. It’s short sighted and makes me personally want to distance myself as quick as possible.I understand that VC is a hits business, its a return capital to LP business but in my eyes it should all be driven by integrity and authenticity. When I become a VC, actually, I think I might just prefer to be an angel and focus on helping founders, cause that’s all that really matters.
I say this: It sucks when the ass kicking boot goes on the other foot.People always say “charge more!” you can charge more!You know Amazon and Walmart have really made me think about this.If you were Macy’s (I am not singling them out just example)When you try and absolutely maximize what you charge, somebody will come in and clean your clock.Then if you try and reduce your price you are in a total quandary. I mean you basically have to say: “Yes I was ripping you off but I’ll stop now that the business is at risk”The worst part however is that the surplus inevitably gets used to grow to the size of the aquarium. It is so hard to not keep a lean staff. You put in beautiful offices, hire additional people that hire additional people, spend money on all sorts of things. Then when you get disrupted you really are in trouble.
One exception for lowered prices (even with management fees) is the force of technology.Personally, I believe (and I guess many others) that the entire history of technology is the reduction of price, increased usage/application and then greater volumes.
If you are saying technology forces you to reduce prices I agree 100%.Let’s just take my retail example. You used to send buyers to find the best goods and you had to order way in advance, and it was hard to order from places like China you had to wait until inventory day every month to really figure out what you sold.Now you Skype, have sophisticated models for what is going to sell, how you are going to move stuff, and have real time data.
When you try and absolutely maximize what you charge, somebody will come in and clean your clock.Yet this is exactly what many companies try to do when they start out. And all that does is increase others who do a quick napkin calculation and say ‘I can sell that for less money’. Then they get into the business. Because the napkin calculations are never correct.On the other hand the extra money you make allows you to grow and potentially corner the market or add people, production and so on. So like with anything it’s never a clear cut thing. Maybe even if you had kept prices low others would enter the business anyway.But for sure ‘I can do it for less’ (napkin calc) definitely ends up giving you competition.One other thing though. I think if you have an established and happy customer base there is nothing wrong and it often makes sense to raise prices or to add charges. I have definitely seen that strategy work.First time I used that was back in the 80’s by charging a nominal charge for delivery when it used to be free. Was an immediate amount of cash just for a decision. And no body stopped using us because of it. Was a great idea. Nobody cared. All they cared about was getting the work on time. They nickel and dime didn’t matter.This is the thing missing from Fred’s post really. If you deliver nobody is leaving you because you are more expensive. If you don’t deliver more people will leave you if you are more expensive than if you were cheap. But the point is really to deliver otherwise you are on shaky grounds.
Well, Amazon has enormous rev, but is not crazy profitable. Take AWS and adv out of the equation and the company looks quite different. We’ll see how Walmart’s pivot is doing this Thursday when they release earnings.The worst industry for charging more when they shouldn’t is restaurants. They too frequently raise prices to their own detriment. There’s high end success (e.g., selective, high margin) and low end success (e.g., high volume, low margin) wrt pricing. Restaurants need to know where they fit relative to quality, service, ambiance, comp, etc. When they get too far afield wrt deliverables, probs arise. Know your lane!
It is not crazy profitable by choice. It has chosen to put customers, revenue growth, and long term investments ahead of short term earnings. And has done so for the last 20 years.It is a great strategy as long as they continue to find growth. And in a fluid and uncertain world, it is a far better approach than over-charging and getting disrupted.
Most of the goods they sell are low margin. At some point in time, they have to fix that. 20 yrs in it’s basically a free pass. The Street has been kind to AMZN cause of their topline growth. I think in some ways they’re gonna be a bit like Costco (obv w/ a deeper ecosystem) w/ profit realization captured in sub fees.
Yes, but they have a portfolio of businesses wirh different margin profiles. The Street values them because of the continued growth. If the growth declines (i think very unlikely for the next few years because of the moats they have built and it is earky days still in ecommerce and cloud), there might be more pressure to show higher profits.
Having studied restaurants because everybody says I should open one (I won’t) The biggest thing they do is go cheap on their raw materials (food).There is a huge cost/quality difference.
At an elemental level, all relationships come down to two human beings on either side assessing if they got a fair deal or if they have been dealt the short end of the stick. You screw people over and they will never forget.If you fight the worst demons of your nature and resist the temptation to take advantage of customers, you would have done yourself a big favor.
I think there is a very wide latitude in terms of deciding what is meant by ‘taking advantage of customers’. You are making as if that is clear cut and it’s math or physics. But it’s not. Someone thinking they are treated fair also depends on who they are and what they know and a host of other factors. Also on their sense of entitlement. You know there are people that freak out anytime a business charging for anything. They think business should not make money at all. They use (writers do this) terms like ‘exorbitant’ because it’s not coming out of their pocket. As an example Phil Sugar and I disagree on the nature of waiting in physician waiting rooms. For what we believe and our experience we are both right. Phil thinks he is not being treated well and I think I am being treated well in the exact same situation. I think waiting is fine and I think it makes sense for the doctor to queue up patients spend time where needed and that it makes things cheaper and more efficient in the end.Also ‘fair deal’ is sometimes a matter of manipulation.Here is an example. When I went to arrange for a funeral I never thought of trying to negotiate or bargain the price down. However at the end the undertaker said after totaling everything up ‘ok and we will take x% percent off of the price’. I figured there are probably a dozen reasons he did this without me eve asking for a discount (honestly something I never considered doing). To numerous to mention. At that point I thought whatever the price was was ‘fair’. The reason though he offered the discount was most likely that others had negotiated, it’s a referral business, and he didn’t want me finding out someone else got a discount and that I didn’t. So what he does (I postulated) was simply offer a discount so I would go away thinking the situation was fair. However that means the actual price was to high to begin with? Is that fair? Also all those times I do negotiate (and others don’t) that means they are (in theory) being over charged. And I have actually said that. I have said I like that people don’t like car salesman and that they are sleezy because that is good for me. Why? Because they make money off of you and are able to charge me less when I negotiate. Is it right that I do that? I don’t care if it is. I worry about me not someone who doesn’t spend time like me knowing what I know and using it to my advantage.if they got a fair deal or if they have been dealt the short end of the stick. You screw people over and they will never forget.Sometimes though it doesn’t matter if they don’t forget. You see there are actually businesses out there that don’t care about anything other than making money (making hay) while the sun shines. The reason is they know you aren’t going to give them referrals and they also know you will never be a customer again. So there really isn’t any reason to care about whether they overcharge or not. Not a comment on ethics just a reality.I don’t know if this is the best example but let’s use this. You run a small shop in some out of the way vacation spot (maybe one of those Island jewelry shops that sell jewelry). In that shop they don’t ever expect to see you again. And they don’t ever expect you will even know if you got a good deal or not. And you are not going to refer them business (or very small chance). So why should they not try to make as much as they can to earn a living (off of rich american tourist) by charging you more than you would pay on Amazon.com? It would be pretty foolish not to do that. Do you want to work every day in a boring jewelry store on a hot island saying the same thing over and over again to tourists? I wouldn’t. They should charge what they can and earn a living. Another example is people expecting a small vendor or seller to match prices with a large seller or someone doing a loss leader
Don’t get me wrong. Pay extra for extra service??? No issue. I am going to wager I am top ten on this board for first class, high end hotel, and restaurant spend. But just ream me for a mattress (just bought one online) no.
Well though as I will say ‘the sea is a cruel mistress.Anytime you find a business trying to take advantage of customers you will also find customers that will not only take advantage of a business but also switch and waste their time at the drop of a dime and without thinking they are doing anything wrong. Because it’s all about them. Plus they don’t run businesses themselves and typically have no clue.Take car dealers. People will shop and spend time with a car salesman (who is on commission) but then will easily go to another dealer over $100 savings. They don’t care that someone spent time with them at all. All they care about is getting the lowest cost. Ditto for people and realtors. Have a realtor show them houses and then just decide not to buy. And no way the realtor can charge for that ‘only be as honest as..’ theory.So it’s chicken and egg. Which came first? The card dealer ripping people off or the people not allowing the dealer to make any money?People are tough. I just had someone want me to sell to them below our cost because other competitors are doing it as a loss leader. Then what the other place will do is sell the customer things they don’t need (they really do this) to make up for the lost money. (So not it’s not milk loss leader either).
“fair”. yes. it’s that complicated.
We had a discussion about this around the time we raised our first fund in 2007. Since we never planned to increase the size of our funds, our view was that we would keep the deal that we did with our LPs in 2007 for the life of our firm, just like you were planning.We’ve done that (as you have) and it feels great at many levels.
it sure does
I have always told my China VC friends that we owe it to the great VC legends in the US who helped cement the 2/20 market practice. Otherwise most of them would still be hustling to prove their worthiness in such a young market. People forget how much blind faith investors put in them when they started. That trust deserves everything.
Let’s break this down: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.”The root of the evil was they didn’t deliver. At least the way the story is being told. If they had delivered and maybe hadn’t raised to 30 but to 25 or better 22 things might have worked out and the story would be told differently. Now you could argue that they LP stayed with the firms during tough times and that didn’t raise fees and so the lesson is ‘don’t rock the boat’. But the truth is the strategy was based on being able to continue to deliver not based on a act of god let say: market change.I have used the same accounting firm forever. So long that the guy who did my work initially (out of college) ended up running the firm until they merged into BDO. Anyway right now I am not super happy with the guy that I deal with there (who I have dealt with maybe for over 10 or 15 years). He is a senior partner. The work is good (I think; I have never been audited) but I honestly don’t like his personality. They charge me literally and exactly what they charged back years ago. They have never raised the price of the work. To me that doesn’t make any sense. I would expect increases. Now if they increased my cost drastically (to your exact point) or every year I might then be pushed to find another firm. I probably won’t because switching accounting firms is hard.  So is switching insurance firms. Right? (Which is why they should jack what I pay, right?) But the point I am making is the problem to be solved is really the service and the personality. Not keeping prices because that way if there is a problem with the service or the personality (or in your case results) the client won’t leave. That is the way I see this. Of course this is very different than a LP parking money.This is the thing missing from the post really. If you deliver nobody is leaving you because you are more expensive. If you don’t deliver more people will leave you if you are more expensive than if you were cheap. But the point is really to deliver otherwise you are on shaky grounds. You don’t do business expecting to not deliver.As always this is general there are different things that apply in different businesses. Each and every situation is different. Maybe for example just psychologically you feel better and more secure to knowing you aren’t rocking the boat. So for sure there is a value in that. Plus my theory has always been that being with a big firm for a long time and not a small no name firm helps with the IRS discriminate audit function. Just a theory because I would place that in the function knowing what I know. Also they probably incorporate the amount of success they have with audits with other clients of the firm and other clients of the partner. Because once again that is how I would write the function.
True, but people always sense when you are approaching the “screwing me over” line. It is a good idea to stay clear of it and provide some healthy buffer to counter bad assumptions.The line varies by customer. For some, it is price, some it is level of service, for others it could be something else.
Well you know I am going to reject that entire concept of ‘screwing me over’ especially in this day and age where everyone thinks things are free and they don’t think anyone (other than themselves) is entitled to earn a living.
Yeah, I understand what you are saying, but this is really context dependent. In some cases, it does come back to bite you. Of course, sellers should charge as much as they can without hurting their long term business prospects, but what that means really depends on the specific seller, the alternatives available to customers in the marketplace, the transparency of info in the market, the nature of the relationship, etc.This is really a moralistic sounding argument and I hate making these, but I do think screwing customers over (as in overcharge substantially just because you can and get away with it) is bound to catch up with the seller eventually. There is something to be said about doing business profitably, but also with heart and not be overly greedy.
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………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 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.In case it’s not obvious an admirable manipulation on the part of the LP with VC’s visiting his office. Drops in story to put fear of god in them. Don’t fuck with me with fees.What’s interesting is that as I always say ‘tell stories don’t ask questions’.  In this case it would be ‘tell stories don’t make statements’.Look at the impact of that one story. Much much much more effective than if he said ‘and by the way don’t even think of increasing my fees’.The story put FUD into you. The statement on the other hand would give you an opportunity to think he might be bluffing or it didn’t matter. Little emotional impact. FUD always wins out in the end. Why? Because it plays on emotion. (Reason an unknown diagnoses with a medical problem is so stressful your mind runs rampant. I use this a great deal when negotiation and it works.)This is actually the way to teach your kids and I have said this before. Don’t tell them directly tell them indirectly what you expect by giving them stories about others and how you view others and how they let down their parents (as the hidden message). (Ditto for man women relationships). Really works well. And judge reaction to story because it’s harder for people to game that.
This is a life friendly lesson Fred.Remember hearing Bill Clinton at a small event asked about how he thought about managing international affairs.He answered that his grandmother taught him that if he wanted to have friends he needed to a friend to others.Stuck with me.
In other words, be nice to those you meet on the way up, as they’ll be the same ones you run into on the way down.
they were raising the carry from 20% to 30%Of course what makes 20% even the right fee? Just because that is what others are charging? In other words ‘it’s standard’? So what? Isn’t that in itself a bit ‘Morty’ I have to say that in business there are many things that I have charged for that are both not standard and not how others charge. Part of this stems from me going into businesses or lines of work where I have no past history in the business at all. So I just make it up on the fly as I go along with what makes sense in my mind based on a host of things going on in my head ‘the gut’. I am really good at that (at the level I am at I will add). For example in the printing business I doubled the cost of paper while it was standard (at the time) to simply mark paper up 33%. Never had a problem at all doing that either. (Now nobody knew that was the formula but in the end they either liked the work and the price or they didn’t). Typically when things went south it was because of a total job failure (ie ‘wheel….of….fuckups’). That is a small example. Unfortunately I can’t give i a public space the good examples.In the case of what I do now (in part) I invented an entire new way of charging for something that others simply charged for only when they succeeded (similar to how a realtor charges only when a sale went though). That seems to work very well and I have found that people who use me like that. I have also noticed that a few others have duplicated what I am doing. I know they are following me simply because they use the exact same working (which I made up) to describe it when they give pricing. Part of the reason I can do this is because I provide value in the transaction even if the transaction doesn’t end up happening. It’s unfortunate that realtors end up spinning wheels and not getting paid many times in the end. To me that is part of the reason for high fees. Not everyone who should pay is paying. What is right about that?My point is just because something is standard and the way it’s been done or the way the competition does it doesn’t mean you have to do the same thing or that if you have done it a certain way you can’t change the way you do it and/or increase pricing.Funny thing. The other day JLM told a story about LP’s in Austin who wanted you to take more money but you wouldn’t. If true (who knows?) and if the only factor (probably not) it would seem likely that if you had more business (investors) than you could handle you would then alter the price you charge for what you do. Not up to 30% but certainly if people are banging down your doors shoving money at you (as JLM claimed but maybe in jest) you could then do 22% instead of 20%. If you deliver it won’t matter. If you don’t deliver even the 20% will matter. The way I see it only knowing (as always) what I read in the blog post. https://avc.com/2018/03/not…
There is a difference between raising prices when there is a high degree of certainty about what you can deliver vs. a business like VC that has a lot of incerto. When you are in an uncertain terrain, be doubly careful of the promise you are making and the price you are seeking to deliver on the promise.When your leverage is more imagined than real, you run the risk of losing it all.
Truth. Stay within the thresholds to keep doing business.
Sounds a little like, “You can trust me. Don’t pay any attention to the fine print on the legal documents. I will always do the right thing. You can trust me that you can trust me. As they say in NYC, ‘you can trust me on this one.'” Hmm.I wonder if Google can point me to any remarks on trust that were learned from “paying full tuition”. Well, in a few seconds, there are lots of such remarks. One of them is:When you start to wonder whether you can trust someone or not, you already know you don’t.”Not from Google just now, but IIRC from Reagan,Trust but verify.As I recall, a BoD member has a fiduciary responsibility to the stockholders, including any VCs, and VCs have a fiduciary responsibility to their limited partners. Then, apparently without a carefully crafted and unusual term sheet, a founding entrepreneur is not nearly first in line in that little business party or in the line “at the pay window”.One from Google just now is:I do not trust words. I even question actions. But I never doubt patterns.Well, likely the author meant patterns that showed that trust was unjustified.For trusting a VC, an LP has a lot more data, e.g., “patterns” from history of the VC, than a first time founding entrepreneur looking for a seed round.Trust is one reason some people take theorems and proofs in math so seriously: The bad news is that, for a lot in life and business, math applies only a little or not at all. The good news is that (A) in well done theorems and proofs, the assumptions are clearly stated and, thus, for a specific application can be checked and (B) the proof can be checked. So, at times in some circumstances, maybe relatively narrow, some math can add some trust.Another reason for the math: Can be super tough to argue with correct theorems and proofs! Some of why I got interested in math is that in grade school, the teachers were all women, really liked the girls, and dumped on me. In math, starting in high school and from then on in school, the dumping stopped!!!! I never had a teacher or prof who could find anything wrong with my proofs. When I went to do original research, no one could find anything wrong with my new theorems and proofs. At times, when a math course started to get sloppy with the theorems and proofs, I saw that I was without my defensive shield and vulnerable and dropped the course.E.g., while eating dinner, it’s fun to watch MIT lectures on quantum mechanics. Part of the fun is that I see more clearly how much of physics does junk math; I saw that as an undergraduate math major taking physics, and now I see that the situation is just a deeply rooted, central part of physics culture.Well, if start to look into the math of quantum mechanics, quickly come to the spectral theorem in Hilbert space. Long ago I saw some versions of that classic topic. But today I saw a nice treatment by one of my favorite authors P. Halmos and later a very serious treatment by another of my favorite authors, W. Rudin, in his Functional Analysis. In grad school, I tried to take a reading course from that book from my department chair, but the book was too advanced for him!Lesson: Even a math result as deep, difficult, and important as the spectral theorem, in nearly all of the real world, has only quite narrow utility! Or, a lot of math is narrow stuff!Gee, right away from Halmos I saw, if have only a Banach space, then from it being a metric space, can take the normal completion of the metric space and get a Hilbert space. WOW! Banach spaces are a bit short on assumptions, but Hilbert spaces are really nice places to work! Super fun stuff!Part of the core technology of my startup is some derivations I did in an infinite dimensional Hilbert space; the Halmos remark doesn’t change anything in my startup, but is still nice to know, actually amazing!There was the old grade schoolBelieve none of what you hear and only half of what you see and still will believe twice too much.Closely related is the oldMeasure twice and saw once.Finally there is the oldLook before you leap.
Standards? The term is pretty loosely applied today. There’s a mixed bag of factors influencing its measure – roi, opportunity, values, performance, expectations, and qualities to name a few. The best institutions and organizations in the world understand the importance and meaning better than most – consistency! When people clearly know what you stand for, what to expect from you, and align with your principles and values, you’ve reached a special status with your customers and stakeholders – trust and respect! The consistent approach has worked through the test of time – opportunities and relationship become accretive as opposed to depletive.