5 Comments

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.

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Great comments, thank you!

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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?

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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.

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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.

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