VCs push startups – will their investors also tighten the screw?

Over the past decade, many venture capitalists have built vast personal fortunes. Some of the money was made through investments in companies that outperformed. But much of their wealth is due to management fees that have piled up rapidly as the size of the funds – growing faster than ever in history – reached unprecedented levels.

Given that the market has changed and will likely remain a more challenging environment for everyone for at least a year or two, an obvious question is what is happening now. Will industry sponsors - "the money behind the money" - demand better terms from their venture capitalists, just as venture capitalists currently demand better terms from of their founders?

If ever there was a time for institutions that fund VCs to use their leverage and push back – on how quickly funds are raised, or the lack of industry diversity, or the hurdles that must be met before profits can be split - now would apparently be the time. Yet in many conversations with LPs this week, the message to this editor was the same. LPs are not interested in rocking the boat and jeopardizing their allocation in so-called top funds after years of strong returns.

They are also not likely to place demands on underperformers and emerging managers. Why not? Because there is less money for everyone, they suggest. “Markets like these exacerbate the divide between haves and have-nots,” one LP observed. "When we add someone to our relationship list," added another, "we expect it 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."< /p>

Some might find the comments frustrating, especially after so much talk in recent years about leveling the playing field by putting more investment capital into the hands of women and other underrepresented people in the workplace. venture capital industry. Highlighting the LP's precarious relationship with the VC, neither wanted to speak on the record.

But what if they had more strength? What if they could tell managers exactly what they think without fear of retaliation? Here are half a dozen gripes VCs might hear, based on our conversations with a handful of institutional investors, from the CEO of a large financial institution to a smaller fund-of-funds manager. Among the things they would like to change, if they had a say:

Strange terms. According to one sponsor, in recent years so-called "time and attention" standards - wording in sponsor agreements aimed at ensuring that "key" people will devote substantially all of their business time to the funds that they rise - began to appear. less and less frequently before disappearing almost completely. Part of the problem is that a growing number of sponsees were not focusing their full attention on their funds; they had, and continue to have, other day jobs. "Basically," says this album, "GPs were saying, 'Give us the money and don't ask questions.'

Disappearance of advisory councils. One backer says these have largely been phased out in recent years, particularly in the smaller funds, and that's a worrying development. These board members "always play a role in conflicts of interest," observes the LP, "including [enforcement] of governance provisions," and it might have been better addressed to " people who were taking aggressive positions that were sloppy from a PL point of view."

Lightning fast fundraising. Many LPs received routine distributions in recent years, but their portfolio managers were asking them to commit to new funds almost as quickly. Indeed, as VCs compressed these fundraising cycles – instead of every four years, they returned to LPs every 18 months and sometimes faster for new fundraising commitments – it created a lack of temporal diversity. for their investors. “You invest these small slices in dynamic markets and it stinks,” says one manager, “because there is no diversification in the price environment. Some VCs have invested their entire fund in the second half of 2020 and the first half of 2021 and it's like, 'Damn, I wonder how it's gonna be?'"

Bad attitudes. According to several LPs, a lot of arrogance has crept into the equation. ("Some [general partners] would be like: take it or leave it.") some cases.

Opportunity fund. Boy do LPs hate opportunity funds! First, they say they find it annoying because they see these vehicles — meant to support a fund manager's "breakout" portfolio companies — as a sneaky way for a VC to navigate his or h...