Many venture capitalists have made millions in the last decade or so. A portion of our earnings came from investing in outperforming companies. But much of their wealth stems from rapidly accumulating management fees as the size of the fund swells to unprecedented levels, continuously raising more rapidly than ever before in history.
Given that the market has changed and is likely to remain tough for everyone for at least the next year or two, the obvious question is what’s happening now. Industry Limited Will his partner “Money Behind the Money” demand better terms from venture managers the way VCs now demand better terms from founders?
Even if there were moments when the institutions that funded VCs used leverage to counteract, the speed of funding, the lack of diversity in the industry, or the hurdles that must be reached before splitting the profits, It seems so now. It’s time. But in my many conversations with LP this week, the message for this editor was the same: LP is rocking the ship after years of solid returns, and the so-called top tier allocations to his fund risk.
They are also less likely to make demands of underperforming people or new managers. why not? The latter group is likely to be offered more time and capital in the go-go market, but LPs are simply exiting now given their own cash constraints stemming from the market. (“Markets like this exacerbate the divide between the haves and have-nots,” said one LP. That doesn’t mean that expectations will be met when markets are really tough.) .”)
Especially in recent years, there has been so much talk about leveling the playing field by putting more investment capital in the hands of women and others who are underrepresented in the venture industry, so I’d like to hear your feedback. No one has attempted to go on record, highlighting the precarious relationship between VCs and LPs who manage venture investment allocations.
But what if they had more backbone? can Do you tell your managers exactly what you think without fear of retaliation? , here are six complaints VCs might hear. Among the things they’d like to change, if they had their druthers:
strange termAccording to one limited partner, in recent years the so-called “time and attention” standard (the language of the limited partner agreement ensures that the “key” person spends substantially all of their business time on the funds they are raising). ) began to emerge. It becomes less and less frequent before disappearing almost completely. Part of the problem is the growing number of general partners. it wasn’t Focus all your attention on funds. They had other day jobs and still do. “Basically, my GP was saying, ‘Give me the money and don’t ask questions,'” says the individual.
Disappearing Advisory BoardLimited Partners say these investments have dropped significantly in recent years, a disturbing development, especially for smaller funds. Such board members “still play a role in conflicts of interest,” the LP said, and “those margins related to governance,” such as “those who have taken a sloppy and aggressive stance from the LP’s perspective.” including provisions regarding
Super fast fundraising. In recent years, many LPs have received regular distributions, but have been asked by portfolio managers to commit to new funds almost as fast as they cash checks. In fact, as VCs compressed these funding cycles (rather than every 4 years, they would come back to LPs every 18 months, sometimes earlier due to new fund commitments), investors Time diversity has been lost for “We invest these little slices in the momentum market, and it stinks,” says one manager. Some VC invested the entire fund in the second half of 2020 and he in the first half of 2021.
bad attitude. According to some LPs, a lot of arrogance crept into the equation. (“identification [general partners] LP argued that much has been said about an even and measured pace for doing things, and that when pace went out the window, so did mutual respect in some cases. bottom.
opportunity fundBoy do LPs hate opportunity funds. One of the first reasons they find these intrusive, he said, is that they use these vehicles to back fund managers’ “breakout” portfolio companies as VCs circumvent the supposed size discipline of their own funds. It’s what I consider to be a mean way to do it.
The bigger problem is, as one LP described it, “inherent conflict” with opportunity funds. As an LP, consider that she may have a stake in the company’s main fund and another type of security from the same company in the opportunity fund, directly in conflict with that first stake. (Consider a scenario in which an LP is offered preferred stock in an Opportunity Fund, i.e. early-stage shares of her institution in her fund are converted to common stock or otherwise “push down the preferred stack.” It will be.)
Finally, the LPs we spoke with were only interested in early-stage capital, but in recent years they have routinely invested in VC opportunity funds to access early-stage capital. They complained that they were being forced to
Asked to support other vehicles of a venture companyMany companies are developing new strategies that are global in nature or investing more money in public markets. But LPs don’t like sprawl (which makes diversifying their portfolio more complicated). They are also uncomfortable with the prospect of playing alongside this mission creep. As one LP disillusioned with the field said: I do, but I have a feeling that I can’t pick a venture fund well. They want you to support multiple funds. ”
LP said he would go along to get along. does not accept it at all, and no pun intended.
However, limited partners and other companies that fund the venture industry may become less timid over time. For example, in another conversation earlier this week with veteran VC Peter Wagner, Wagner observed that during the dot-com crash, many ventures gave up his LP by scaling back funding. . Axel, with whom Wagner spent many years as general partner, was among these organizations.
Wagner suspects the same thing could happen now. Oversees multiple funds and multiple strategies that can deploy
But if their returns don’t hold up, LPs may get fed up and take action, Wagner suggested. A few years after [better] economic environment. ’ In short, perhaps that moment has passed. But even if that weren’t the case, even if the current market continues like this, he said: [more favorable LP terms] It will be discussed in the next year or two.”