For most of my time as a venture capitalist, our ecosystem has been a series of handoff across stages based on fund size and strategy. Lately it feels like the handoff is broken and there are no lanes
- I think this means that small firms need to constantly adapt and take on more risk - either in terms of focus or on less proven founders. This is how Precursor started, and I do think this is the only path forward.
- I think for Companies that can only aspire to a $1-3B outcome (which have been horribly valued by the stock market in the last cycle), the only path forward is going to be really capital efficient and profitable - and grow more at 90% y/y with 20% Net income margin vs. 150% with -40% net income margin. This is the only way these companies become relevant public Companies, and PE shops would love to pay up for all these profits.
Charles, as an LP in many funds, one of the things I am always considering is the alignment of incentives and interests between the three actors: LP, GP and Founders. While I generally think that there is more alignment in smaller funds, I also believe that when the system is well organized in the way you say, it is easier for LPs to understand the risk/reward. While it is true that there are only 100 points of equity, the old system of coopetition rather fierce competition seems to have fostered a positive sum outlook in the smallish VC ecosystem. This new realignment creates complications in how an LP should evaluate a fund. Are things becoming more zero sum? How do you think this mis/re-alignment effects LPs - especially those investing into small and specialized early-stage funds?
If I were in your shoes, I would talk to your GPs about how they think about secondary liquidity and selling out of positions before M&A and IPO. I think fund sizes will come down and this will be less of an issue, but I'm not sure when.
Thank you for the response. Its a painful, but prudent decision to take chips off - with early stage investing the bulk of the multiple compounding doesn't take place until years 7 and after give or take. I'm sure early-stage investors who made good investment decisions in 2012-15 are grumbling about the emoliated cap tables of their companies brought on by the excessive liquidity and tourism in 20/21 and wishing they took some off. As all of these companies work through their issues, I would also be curious how the relationships between early investors and later stage investors change as a result of what happened and how much of an effect it will have on those funds from a decade ago that were perturbed by a major disturbance in the Force. Have a great day.
Hi Charles, I 100% agree with you.
A few comments though:
- I think this means that small firms need to constantly adapt and take on more risk - either in terms of focus or on less proven founders. This is how Precursor started, and I do think this is the only path forward.
- I think for Companies that can only aspire to a $1-3B outcome (which have been horribly valued by the stock market in the last cycle), the only path forward is going to be really capital efficient and profitable - and grow more at 90% y/y with 20% Net income margin vs. 150% with -40% net income margin. This is the only way these companies become relevant public Companies, and PE shops would love to pay up for all these profits.
Great comments, thank you!
Charles, as an LP in many funds, one of the things I am always considering is the alignment of incentives and interests between the three actors: LP, GP and Founders. While I generally think that there is more alignment in smaller funds, I also believe that when the system is well organized in the way you say, it is easier for LPs to understand the risk/reward. While it is true that there are only 100 points of equity, the old system of coopetition rather fierce competition seems to have fostered a positive sum outlook in the smallish VC ecosystem. This new realignment creates complications in how an LP should evaluate a fund. Are things becoming more zero sum? How do you think this mis/re-alignment effects LPs - especially those investing into small and specialized early-stage funds?
If I were in your shoes, I would talk to your GPs about how they think about secondary liquidity and selling out of positions before M&A and IPO. I think fund sizes will come down and this will be less of an issue, but I'm not sure when.
Thank you for the response. Its a painful, but prudent decision to take chips off - with early stage investing the bulk of the multiple compounding doesn't take place until years 7 and after give or take. I'm sure early-stage investors who made good investment decisions in 2012-15 are grumbling about the emoliated cap tables of their companies brought on by the excessive liquidity and tourism in 20/21 and wishing they took some off. As all of these companies work through their issues, I would also be curious how the relationships between early investors and later stage investors change as a result of what happened and how much of an effect it will have on those funds from a decade ago that were perturbed by a major disturbance in the Force. Have a great day.