It’s no secret that in the past few years, very few partners in venture capital firms have seen a “carry check” in years. What are they living on? Management fees, of course. That state of affairs could have gone on much longer but for the recent financial crisis. It is much harder for VCs to raise money from rich individuals and institutional investors and it has become just as difficult for them to take their startups public or sell them to a larger company:

Only six venture-backed start-ups went public last year, the fewest since 1977 and down from 86 in 2007, according to data released Monday by the National Venture Capital Association and Thomson Reuters. Venture capitalists sold 260 companies in 2008, down from 360 in 2007.

What does this mean? Limited partners will demand better performance and more transparency (to justify those management fees). The number of VC firms will dwindle and fewer startups will get funded.

Side note – Here’s an explanation of a venture capital fund’s “carry:

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.

(Read more at A Get Rich Slow Business)