What Are Aligned Incentives in Investing?

Aligned incentives is an investment model where a venture capital firm and its partners are rewarded for working with founding teams to build successful and sustainable companies. It differs from the traditional model, which is focused on raising and returning capital.

At York IE, we think differently about venture capital. My co-founders and I have experienced successful exits under the traditional VC model in the past, but we’ve also seen how close they can come to going astray — and they often do. That inspired us to take a different approach with aligned incentives.

The Traditional VC Model

With traditional venture capital, if I’m earning a management fee based on the size of the fund, I’m being paid to deploy capital within a specific timeframe, and that capital has a markup or two. That then allows me to go out and raise a bigger fund so that I can earn a bigger management fee. But those markups are nothing but paper returns. I’m making a larger gain on paper, but it’s artificial until it is liquid.

Originally posted at York IE RSS

Tags: