Venture capitalists are pushing startups — will their investors squeeze companies, too? • TechCrunch

Over the past decade or so, many venture capitalists have built huge personal fortunes. Some of the money has been made through investments in better performing companies. But much of their wealth stems from management fees that grew rapidly as the size of the fund – which has been growing consecutively faster than ever in history – skyrocketed to unprecedented levels.

Given that the market has changed — and will likely remain a tougher environment for everyone for at least the next year or two — one obvious question is what will happen now. Will the industry’s limited partners — “money behind the coin” — demand better terms from their venture managers, like VCs currently demand? better terms from their founders?

If there has ever been a time when institutions that fund VCs used their leverage and pushed back – on the fast pace of funding, or the lack of diversity in the industry, or the barriers that had to be met before the profits could be shared. profit – then now seems to be the time. However, in many of the conversations with LP this week, the message to this editor was the same. LPs have no interest in rocking the boat and put their allocation in so-called top-tier funds at risk after years of solid returns.

They are also incapable of making demands on underperformers and emerging managers. Why not? Because there is less money to go around, they suggest. One LP commented: “Markets like these exacerbate the gap between haves and have-nots. “When we add someone to our list of relationships,” another added, “we expect it to go to at least two funds, but that doesn’t mean we can’t. meet those expectations if the market is really tough.”

Some people may feel uncomfortable with the response, especially after so much discussion in recent years about leveling the playing field by putting more capital in the hands of women and those who are not. Others are underrepresented in the venture capital industry. Emphasizing the LP’s precarious relationship with VCs, no one wanted to speak on the record.

But what if they had more backbones? What if they maybe tell managers exactly what they think without fear of reprisal? Here are half a dozen complaints venture capitalists are likely to hear, based on our conversations with several institutional investors, from an executive at a major financial institution. to a smaller fund manager. Among the things they would like to change, if they had a crusher:

weird terms. According to a limited partner, in recent years the so-called “time and attention” standard — the language in limited partnership agreements that ensures that “key” people will contribute spend most of their time in business for the fund they’re raising money for — starting to show up less and less often before disappearing almost entirely. Part of the problem is that there are more and more general partners are not focus all their attention on their funds; they had and continue to have other day-to-day jobs. “Basically,” says this LP, “general practitioners say, ‘Give us the money and don’t ask questions.’”

The advisory board disappeared. A limited partner said these have largely fallen in recent years, especially when it comes to smaller sums, and that is a worrying development. LP observes that such board members “still play a role in conflicts of interest,” observed the LP, “including [enforcing] governance-related terms,” and that might have better addressed “people who are taking aggressive and negligent positions from an LP perspective.”

Super fundraiser. Many LPs have received regular distributions in recent years, but they have been asked by their portfolio managers to commit to new funds almost promptly. Indeed, when VCs compress these fundraising cycles — instead of every four years, they return to LPs every 18 months and sometimes faster on new fund commitments — it creates a lack of diversification. time format for their investors. “You are investing these little slices in bull markets and it sucks,” said one manager, “because there is no diversification in the price environment. . Some VCs invested their entire funds in the second half of 2020 and the first half of 2021 and it was like, ‘Gosh, I wonder how that’s going to work out?’”

Bad attitude. According to some LPs, a lot of arrogance has crept into the equation. (“Sure [general partners] would be like: take it or leave it.”) The LPs argued that there is much to be said about measured speed to do things and that when speed is out of the window, it is in some cases So does mutual respect.

Opportunity Fund. Boy do LP hate opportunistic funds! First, they say they find these annoying because they see such vehicles – intended to support the fund manager’s “disruptive” portfolio companies – as a sneaky way to a venture capitalist navigates around the size of their fund’s supposed size.

A bigger problem is that there is “inherent conflict” with opportunity funds, as one LP describes. Consider that as an LP she can have shares in the main fund of one company and another class of securities in the same company in the opportunity fund which can be directly opposed to the shares. that first. (Assume she offers preferred shares in an opportunity fund while her institution’s shares in the early stage fund are converted to common shares or otherwise “pushed down the preference stack.” treat.”)

The LPs we spoke to this week also said they were unhappy about being forced to invest in VC opportunities to access their early stage funds, which has obviously happened a lot. much in the past two years.

Being asked to support other means of joint venture companies. Many companies have launched new strategies that are global in nature or see them invest more money in the mass market. But surprisingly, LPs don’t like expansion (it makes diversifying their portfolio more complicated). They also become annoyed with the expectation that they will play along with this quest. An LP very pleased with being assigned to one of the world’s most renowned joint venture firms, but also disillusioned with the company’s newer areas of focus, said: “They have earned the right to do business. a lot of what they’re doing, but there’s the feeling that you can’t just pick a venture fund; they want you to support multiple funds.”

LP says he comes along to get along. The venture capital firm told him that if its backend strategies weren’t right, the decision wouldn’t count as a strike against his organization, but he didn’t quite agree with it, no pun intended.

So what happens in a world where LPs are afraid to set foot in their figurative form? It largely depends on the market. If everything recovers, you can expect that the LP will continue to cooperate, even if they do some private activities. However, during a protracted downturn, partners who limit venture industry funding may become less timid over time.

For example, in a private conversation earlier this week with veteran venture capitalist Peter Wagner, Wagner observed that after the dot.com crash of 2000, a number of venture firms left LPs. their way out of trouble by downsizing their fund. Accel, where Wagner has been a general partner for many years, is among these outfits.

Wagner suspects the same will happen now. While Accel focused only on early stage investments at the time, today, Accel and many other power players oversee multiple funds and multiple strategies. They will find a way to use all the capital they have raised.

However, if profits don’t grow, LPs may run out of patience, Wagner suggested. In general terms, he says that “it takes quite a few years to play hard” and that in the years to come, “we could be in a different world.” [better] economic environment.”

In short, perhaps the time for feedback has passed. If not, however, if the current market persists, he says, “I wouldn’t be surprised at all if [more favorable LP terms] being discussed in the next year or two. I think that could happen.”