VC firms face new scrutiny from LPs
axios.com
axios.com
> Calpers' venture returns have been historically lackluster. From 2000 to 2020, its venture performance was a dismal 0.49%, compared to 11.59% in buyouts. Calpers declined to comment.
https://pitchbook.com/news/articles/calpers-venture-asset-cl...
How LPs didn't take a step back and ask, "does this strategy work?". I don't know.
People forget how tiny the VC business is: just a pimple on the PE market. Typically it’s a tiny part of a big investor’s portfolio, just to have some exposure diversity. You can tell how important it is to them when you attend an LP meeting for a VC fund: the GPs may be bowing and scraping* but among the LPs’ representatives are a lot of 22 year old first year associates, which shows how unimportant the sector is to these big guys.
* props to the GPs who are both not arrogant and not ingratiating to their customers (cough sorry, “LPs”). In my experience there are fewer than you would think.
Ironically, Calpers' excuse for their poor returns is that the "top tier" VCs (such as Sequoia) now exclude them due to their public reporting requirements, and therefore they are forced to deploy to tier 2 managers.
VC is a wide gamut, the top 25% generates something like 30% IRR while the bottom 25% is negative return.
LP in VC is just like VC - have to get in on the good deals and I think maybe since it's harder to evaluate deals, than say for building some homes, a lot of money goes to crap.
The problem VCs have is that the signal that a company is VC funded is now only a sign that the founders are connected. It says nothing about competence or ability to execute at all.
Lots of founders don't have good credit, or maybe even any credit at all. Do we really want to make it even harder to raise? There is no "due diligence" that can detect when you've invested in a turkey, or even a turkey that later turns out to have combined funds (perhaps fraudulently) or practiced financial mismanagement to the point that he was bailing out Alameda with FTX funds.
That's why you invest in a wide variety of things. FTX is why LPs might be hesitant to invest in Sequoia in the future, but the "variety" part might also be why they don't hesitate, too.
It's funny to use this as some kind of absurd example when in many places this kind of stuff is standard before someone lets you rent an apartment. Isn't vetting founders and their companies before risking the LP's money part of the job for a VC?
SBF was seen as a catch because of his elitist and entrepreneurial background, with two professor parents at Stanford, a background on Wall Street, a hilariously affected backstory about international cryptocurrency arbitrage, crazy ideas on how his future wealth could (and would) save the world, and a later history of donating or bundling crazy amounts of money for his preferred political party (and anyone else in either party or agency that he could perhaps influence with donations).
That's why checking credit report or even criminal background is so absurd in this context. Checks like this won't do anything except further entrench the elitist anti-meritocracy that currently infects the VC community. Lots of people can walk into a bank and get a loan, but very few can walk into Sand Hill Road and raise a round of any size.
Founder has no experience, a buggy non functioning mvp, no customers, no traction.
He only got investment by plagiarising a paper that got cited a few times and then exploiting the fact that he fooled one clueless VC into giving them money so he must be good. This snowballed into other investors giving money. No technical DD, I spent 20 minutes reading the code when I started and could tell it was a whole bunch of nothing - a tiny system that creates a docker container but worse (reinventing the square wheel)
Well he might have potential you say? Nope. It’s been 2 years and he has completely failed to execute and get even a minimal number of customers (I.E. the individual ones that try it immediately churn because it’s buggy and useless)
It’s a complete circus, I can’t believe that a group of well known VC names are so clueless
Currently the only punishment a bad VC gets, is that they still collect their fees, and get the wag of the finger from the rich people who gave them money.
Other approach is for LPs to reject any percentage based management fees.
I think a skin in the game payout structure for VCs would be better.
- VC has to commit x% (5%)? of their net worth into the fund
- VC gets bonus payouts only on individual investments that are net profitable (something like 3% of the net profit from the invested LP money)
- Could also be augmented with a Flat Yearly Salary/Fee to cover basic operations (not a percentage based fee)
If I was an LP thats how I would do it. No way would I agree to a flat percentage mangement fee.
To begin with, most GP's have north of 5% of their net worth in the Funds or they're leveraged and borrowing against their homes etc. Partners usually are paying 30ish of their take home into funds.
Individual investments on a single deal are called an "American Waterfall" Vs a "European Waterfall," which is the whole fund. Each incentivization structure provides remarkably different issues. neither is perfect. BOth are prevalent in the market today.
Flat cost structure funds exist as well. Also, remember all fees are just added to the costs the fund needs to return. So VCs are incentivized to keep them low, they many don't do this.