« Harvard Business School VC Conference | Main | Sour Grapes, Wolves and Sheep »

January 22, 2006

“The Grass Is Always Greener”…aka The Circle of Envy

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!

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d83424781853ef00d83426419053ef

Listed below are links to weblogs that reference “The Grass Is Always Greener”…aka The Circle of Envy:

» The Circle of Envy from Jeff Clavier's Software Only
You can read the long version of the story on Jeff Bussgangs blog, but in short, the Circle of Envy in Private Equity is spelled out the following way: Entrepreneurs envy VCs b/c they get to make a lot of money collecting management fees, and not worki... [Read More]

» The Circle of Envy from The Dealmaker
IDG Ventures Jeffrey Bussgang has a fascinating post on what he calls the Circle of Envy - the strange dynamic of envy between entrepreneurs, VCs, private equity and hedge fund executives. Heres an excerpt: VCs ar... [Read More]

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

Jeff, I think that's a great post. Very well written, and frightfully spot on.

As a founder, the idea of diversification (or the lack of) is a definite chip on my shoulder.

Hello,

Just wanted to say that i thought your article was very insightful. As an entrepreneur myself (Just starting out) i realize there is a value in things my organization develops and that being said i always want to progress, learn and build new ideas into businesses. It's something i have a passion for and i am patiently working towards. I would enjoy talking to you more at length if you are interested as you seem to be a very bright and knowledgeable individual. Cheers

Lucas Arnold

great piece! so so true.

Although I myself sometimes envy, the VC's, PE, etc; It's all about finding your comfort space; whether it be as a entrepreneur, VC, PE, etc.

great read. thx.

Um...are any of these guys hiring?

the thing most entrepreneurs who grouse about their VC backers don't realize is that the earnings of the VC pale in comparison to those of the most successful entrepreneurs they have backed.

risk. reward. correllated. big surprise.

Jeff - Great post. As both a VC and an investor who has always had holdings in buyout, hedge, and VC, I have always felt that at any given moment someone is riding a wave and someone is falling off of the last one. Every industry has its ups and downs but at the end of the day, I still believe that the venture business is the toughest because we must create lasting enterprises that build value for everyone involved. Yeah there are the VCs that just get in and out like the LBO funds or Hedge houses, but those guys are essentially hedge funds disguising as VCs. I think you could also argue that the incentive structure of VC funds is the worst compared to buyout and hedge which have greater liquidity and thus earlier carry. Well...I guess I too am involved in the "Circle of Envy!"

Just happened upon your blog, interesting read. The insights presented on your various posts are proving to be helpful as I start to look at what path I want my future to take. Thanks!

Can anyone of u tell me how the incentive scheme and carried interest work in VC and private equity and what is the general practice regarding this.

Ash,

I would look that information up on Wikipedia.com and Investopedia.com, they have long detailed explanations of each that should answer most of your questions.

- nice post

Thanks for the resource suggestion.

True. Good post.

Hedge fund managers can literally lose 20 years of work building up their firm after just 1 hour of bad market performance, pretty scray to think about.

- Richard

Its a perfect blog.

amazing, i was just siting here, (just back from a friends house who is married and settled with 2 gorgeous babys) and was thinking what i should writing in my facebook status...and the saying ' the grass is ...' came to my head! i didn't know what it meant, so googled it! truly reflecting my subconscious! im not jealous of my friend, in fact i was relieved to be back to the calm of my own house, but i there is something deep down wanting what she has!

thanks for that article, was very interesting.

Jeff,

Daniel Nerezov turned me on to this post because I'm in the start-up phase of a micro-venture capital fund. It is an interesting examination of the dynamics of peoples thinking. I'm a successful entrepreneur and feel that the next step for me is to raise capital to help others start companies.

This article describes my thinking to a 'T'... good post!

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Working...
Your comment could not be posted. Error type:
Your comment has been posted. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.

Working...

Post a comment