What is “Carry” or “Carried Interest”?

Hey, everyone. Welcome to another episode of the Invest Stream. This episode is a little bit different. I did do some illustrations and drawings to get the point across on Carry a little bit more effectively. So if you'd like to watch the video, go on over to YouTube. The link is in the show Notes. Thanks again for listening. Today I'm going to talk about carry. What is carry? How does it work? Coming up next. Welcome back, everyone. So what is carry? Carry is essentially how VCs make money. That's pretty much it. That's how they get rich. The starting point is our fund. The fund has GPs or general partners. And general partners are responsible for investing in startups and managing the fund. GPs, however, need LPs. LPs are limited partners or silent investors in a fund. They're the ones who put money into a fund. Now, the GPS will take the money that has been invested in the fund and they will look at lots of startups and they will invest money into these companies on behalf of their LPs. So let's say the GP invests a dollar into startup one and a dollar into startup two. Okay? Now, after some period of time, it could be a couple months, could be a couple of years, many years. Startup one exits for a certain amount of money. But let's just for simplicity sake, let's say that it exits and it returns $2 back to the fund. Startup 2 also exits and returns $3 back to the fund. So the fund now has an additional $3 that go into it initial principal of $2, plus the $3 in profit from both of the startups. Let's get to the carry part. Typically, most funds have a 20% carry, and there are certain thresholds. Sometimes carry is determined based on the multiple that the fund has returned. The multiple could be 2x3x5x1x. It really depends on what the fund and the LPs agree on early on. But for simplicity's sake, let's just say it's 20% of all profits, right? So now in this particular case that we're talking about, the profit is $3. So $3 times 20% is 60 cents. So out of this pool, the GP will get 60 cents. The remaining $4.40 in this fund will go back to the LPs. So in this case, the LPs have netted $4.40 on a $2 investment. The GPS in this case did not invest anything and got 60 cents. So this example doesn't take into account management fees. So, for example, if I was managing a fund of $2. I didn't get paid to manage that fund. I was doing it for free with the hopes that the fundamental eventually will make a lot of money. And at the end of it, when I sold, when these companies exited and I returned money to the LPs, I got 60 cents out of the $5 that were there. $5 total, $3 profit. So I got 60 cents that I wouldn't have made otherwise. Now if you look at a $5 fund, that doesn't seem like a whole lot, but when you're talking about $100 million fund that goes up by 2.5x and you get 20% of that 100 million dollar fund and we'll just say it's exactly 50 times our example, right? So we made a profit of 150 million and 20% of that is $30 million. That's a lot of money. So this is what VCs work for, this piece right here. Everything else is basically just to put food on the table and survive. This is where VCs get rich and this is how they make money. Carry is probably the most important thing that a VC cares about. If you liked the video, please give it a thumbs up. If you've got any comments or thoughts or suggestions on other topics that you'd like me to cover, please hit them in the comment section. If you haven't subscribed yet, please hit the subscribe button. I look forward to seeing you again on investream soon.