Over the last decade or so, many venture capitalists have built vast personal fortunes. Yet in numerous conversations with LPs this week, the message to this editor was the same.
LPs aren’t interested in rocking the boat and putting their allocation in so-called top tier funds at risk after years of solid returns. Because there’s less money to go around, they suggest.
“Markets like these exacerbate the divide between the haves and have-nots,” observed one LP.
“When we add someone to our list of relationships,” added another, “we expect it’s going to be for at least two funds, but that doesn’t mean we can live up to those expectations if the markets are really tough.”
Here are half a dozen gripes that VCs might hear, based on our conversations with a handful of institutional investors, from a managing director at a major financial institution to a smaller fund of funds manager.
Among the things they’d like to change, if they had their druthers.
“Basically,” says this LP, “GPs were saying, ‘Give us money and ask no questions.’”
Such board members “still serve a role in conflicts of interests,” observes the LP, “including [enforcing] provisions that have to do with ...
...governance,” and that might have better addressed “people who were taking aggressive positions that were sloppy from an LP perspective.”
Many LPs were receiving routine distributions in recent years, but they were being asked to commit to new funds by their portfolio managers nearly as fast.
“You’re investing these little slices into momentum markets and it just stinks,” says one manager, “because there’s no price environment diversification. ...
...Some VCs invested their whole fund in the second half of 2020 and the first half of 2021 and it’s like, ‘Geez, I wonder how that will turn out?’”
(“Certain [general partners] would be like: take it or leave it.”) The LPs argue that there’s much to be said for ...
...a measured pace for doing things, and that as pacing went out the window, so did mutual respect in some cases.
First, they say they find these annoying because they consider such vehicles — meant to back a fund manager’s “breakout” ...
...portfolio companies — as a sneaky way for a VC to navigate around his or her fund’s supposed size discipline.
(Say she’s offered preferred shares in the opportunity fund while her institution’s shares in the early-stage fund get converted into common shares or otherwise “pushed down the preference stack.”).
Being asked to support venture firms’ other vehicles.
Says one LP who is very happy with his allocation in one of the world’s most prominent venture outfits, but who has also grown disillusioned with the firm’s newer areas of focus: “They’ve ...
...earned the right to do a lot of the things they’re doing, but there is a sense that you can’t just cherry pick the venture fund; they’d like you to support multiple funds.”
If things rebound, you can probably expect that LPs will continue to cooperate, even if they do some grousing privately. Accel, where Wagner spent many years as a general partner, was among these outfits.
Whereas Accel was narrowly focused on early-stage investments at the time, Accel and many other power players today ...
...oversee multiple funds and multiple strategies. They’re going to find a way to use all the capital they’ve raised.
Speaking generally, he said that “it takes quite a number of years to play out,” and that years from now, “we might be in a different [better] economic environment.”
If it hasn’t, however, if the current market drags on as is, he said, “I wouldn’t be surprised at all if [more favorable LP terms] were under discussion in the next year or two. I think that could happen.”