Radically Reinventing Venture Capital

Last month, I moderated a panel discussion about reinventing the venture capital model. I’ll be doing the same next Friday in New York. In both cases, the underlying thesis was that the venture capital model is broken at worst, and dysfunctional at best. It’s a thesis with which I won’t argue, given that median fund returns since 2002 are underwater. When most LPs would have been better served by putting their money in the mattress, it’s clear that something must be done.

Unfortunately, almost all of the discussion to date has been around the edges. Very reminiscent of the 2002-2003 “back to basics” era, which focused on things like reduced fund sizes, more conservative valuations and fewer investments into saturated spaces. Those were necessary steps, but in many cases slowed the bleeding rather than stemmed it. What we may need is something far more radical.

The trouble with radical proposals is that they’re tough to come by. Luckily, a Boston-area VC has come up with one such suggestion, which I lay out below. For reasons that should become obvious, he asked not to be identified. There are obviously a lot of moving parts here – both pragmatic and philosophical – and I’ve already gotten feedback from some prominent LPs and GPs. I hope you’ll also contribute either via email or comments. And if you have a different concept for reinventing venture capital, please be sure to pass it on:

Venture capitalists are a lot like professional athletes. They often work in teams, but are largely judged on their individual statistics. A great VC can be part of a lousy fund, because his successful deals get drowned out by the aggregate performance of mediocre partners. To keep the analogy going, think Paul Pierce on the ’06-’07 Celtics.

But what if you could have changed the ’06-’07 NBA from team vs. team to one-on-one? Wouldn’t Pierce have become far more successful?

That’s kind of the idea here. This proposal would have an experienced institutional LP (likely a fund-of-funds), create a series of loosely-affiliated evergreen “funds,” with each fund to contain just a single VC. In other words, cherrypick the cream of the crop. Give the VC an annual salary of around $1 million, an assistant, an associate and 15% of any carry. Perhaps a three-year contract, with a two-year LP option.

If the VC’s investments are successful, both he and the LP would make more money than had they both been working under the traditional structure. If the VC’s investments fail, then the LP presumably would lose less money than had it invested in a failed fund of multiple partners.

There obviously would be tons of issues raised by something like this, so let me briefly address a few of them:

  • Isn’t the VC partnership model inherently valuable, because it provides a VC with feedback and advice? In many cases it is, but in just as many cases it becomes a quid pro quo of silence. Don’t knock someone else’s deal too hard, because then that guy might come at me. Plus, a good VC should have his own network of industry experts to provide advice.
  • What would be the relationship between the individual VCs selected? The LP would have to hire some sort of general manager and CFO to oversee the whole thing. I could also envision a monthly meeting for all the VCs, in which they’d discuss their own work. This could provide some of the aforementioned feedback, but without any risk of veto power. It also would help lay the groundwork for the group to (at least temporarily) manage one of the VCs deals, in case he gets hit by a bus.
  • Just a monthly meeting? Yes, which means LPs would get three extra workdays per month from their VCs. That’s 36 extra workdays per year.
  • Wouldn’t you have to legally structure this as a partnership, to maintain preferential tax treatment? Yes.
  • Would a superstar VC want to be beholden to a single LP? If the LP has deep pockets, I don’t see why not.
  • Are LPs smart enough to pick the right individual VCs? This is the multi-million dollar question. A good LP should already know which individuals in his general partnerships are performing better than others. This includes younger partners who may have strong deals, but who have not yet generated returns due to the macro exit blockage. It’s entirely possible that an LP would pick wrong, but that’s also true of the current partnership model. My advice would be the following: Imagine each of your GPs was trying to raise follow-on funds. Is there an individual or two at any of those firms whose departure would cause you not to reinvest. If so, that might be your guy (or gal).

Again, this is a very rough draft of something. I’m hoping you, dear readers, can help polish it up…

37 Comments

  • This is an interesting approach and could work if a single LP has access to a single high performing proven blue chip vc. On the other hand, would a superstar VC want to be beholden to a single LP? Maybe in this market – capital is really scarce.

    Obviously what you are proposing is a big change from the norm. What I am seeing is the blue chip firms growing geographically and by strategy and becoming more “institutional” like their buyout cousins. This strategy in the venture market is in its early days but so far there doesn’t seem to be a standout from a performance perspective and some of these firms are really stretched from a management standpoint (which is really tested in down markets). At the end of the day, availability of capital – or lack thereof- will be a big differentiator as far as setting reasonable valuations.

    I believe that it is likely that you will see some great companies get formed over the next few years as the best entrepreneurs/managers have to grind it out to survive. The kind of companies they will build will endure and grow in the long run. And it is likely that only a select number of VCs will continue to find such great entrepreneurs – unless the public markets come back in a huge way and the whole industry gets a lift. Hard to see that happening in the next couple of years.

  • A three year contract is very short time period in the investing cycle. A majority of companies are still in growth mode. In three years it is highly unlikely that there would be liquidity. So the LP is now going to start judging what a early stage companies worth and possilbly end the relationship with a GP based on their calculations. If the GP’s investments are all worth zero it is an easy call but what about the other investments (especaily under FAS 157). Who is going to make these judgements and if that person is so good at these judgement calls then why aren’t they making the VC investments for the LP?

  • Jon,

    I agree 3-years is short in the investing cycle, and the VC who suggested all this originally suggested a 5-year contract. Just seems to me the LP should have some out in case they feel the VC is doing a lousy job. It’s very unlikely they’d not pick up the option — given that they’d want the VC to keep managing the cos.

    How would you structure it?

  • Very interesting concept. I would make the following observation. If the LP picks a star partner from a successful VC firm and that partner finds himself bidding against his old firm on an interesting investment opportunity the firm gets to bring the whole Boston Celtics team and reputation to the party and the star partner gets to bring his administrative assistant. My point is it is not a given that an entreprenure would buy in to the star’s personal reputation over that of the VC firm that has a very favorable track record. It would probably work better for the partner who comes from a firm that is not as well known or does not have a successful track record although if he or she comes up against a quality firm in the bidding process he or she will probably loose unless of course he or she gives away the store in negotiations in which case the LP ends up with the same kind of returns they are getting under the present model. Also beware of the superstar investment partner who can not match up his socks in the morning unless completely surrounded by a superstar support team. Big leap from a superstar investment professional and an entrepruner who can manage a VC start up with an admin assistant and associate. Still its an interesting concept.

  • Sounds like the suggestion is really: Close lots of VC shops. Have the newly free GPs try to latch onto a single LP for whom they will do proprietary deals. The others get out of the industry. What you’re asking for in that sense is smarter LPs to not give money to people who are doing a bad job, which they have so far proven unable to do (or else you wouldn’t be looking for suggestions to radically change VC).

    Maybe bad VCs are screwing up the market for everyone else, but LPs are enablers.

  • I coulnd’t agree with you more on your VC solution. I am the CEO of a biotech co and in our attempts to raise capital, it is clear the perfect storm of a broken VC business model, serious economic negative climate, fear, etc.. is increasingly driving VC’s to not invest in exactly the kind of investments they are supposed to be investing in. Instead they have become asset managers, basicsally sitting on their LP’s money because they are scared…scared of making a mistake, scard of losing money, their job, etc.. Behavior driven out of self preservation always is a death spiral esp in a world where these guys are being paid (supposedly) to take risk above market.

    As long as they keep behaving the the way they have been the past year, they will ceil their own fate.

  • What happens after all of the annointed individual VCs die?

  • Gerald: I agree in theory, which means it would be incumbant for the individual VC to show some real numbers to the entrepreneur. Show them who’s actually made money in that firm. It’s something most entrepreneurs don’t spent enough time bothering to figure out. I’d also say, however, that firm reps are losing importance — with a few obvious exceptions like Sequoia. So many firms have so many portfolio dogs, that the real distinguishing factor has become the individual partner.

    Also, the individual VC would be bringing deep pockets. Given how card it is to raise capital right now, a lot of VC “firms” can’t say that.

  • You
    make some good points, but I think there are a few caveats you forgot.

    1.) You haven’t considered the anti-Paul Pierce – the team player. In
    keeping with your basketball metaphor – consider the Chicago Bulls of
    the 90’s. Sure, Jordan was the super star, but could MJ have won all
    those championships without Pippen, Rodman, Kerr and Kukoc? All
    individually excellent players in their own right, but a case where the
    team was greater than the sum of the parts. So too I believe it is with
    VC firms – each partner may have different strengths, but together they
    combine to help each other avoid pitfalls and critically examine
    investments. For an example of this, see Benchmark Capital during the
    dotcom boom as chronicled in the (excellent) book eBoys.

    2.) I believe a lone VC would have trouble creating the “portfolio
    effect” that is key to VC returns. I don’t imagine a single partner
    would have the manpower to digest enough leads, do enough diligence, etc
    to distill the wheat from the chaff in order to make enough investments
    to find that single home-run that makes the fund and counterbalances the
    multiple write-offs. You could argue that the LP would realize this
    effect one step up the ladder, as they would employ multiple VCs.
    However, that really raises the barrier to entry for VC investments, as
    an LP could not invest in VC without incurring the significant headache
    of basically assembling their own VC firm, and performing due diligence
    on lots of lone wolf VCs. This is the reason VCs have organized into
    firms and operate as they do today – LPs are willing to pay for someone
    else to have all that overhead in order to create the “portfolio
    effect”.

    Agree? Disagree?

  • Hi Dan, in terms of institutions backing the 1-GP idea, a sub-form of
    that has already been going on. These are standard venture funds and
    don’t fully match your idea, but all started as 1-GP entities:

    – Dave Whorton, Tugboat Ventures
    – Mike Maples, Maples Investments
    – Jed Smith, Catamount Ventures (they’re bigger now, but he started as a 1-man GP)
    – Jo Tango, Kepha Partners

    In terms of an evergreen structure, that’s actually how Josh Kopelman at First Round got his start. He last year raised a standard venture fund, but prior to that, he raised a pool of money each year.

  • Bill,

    1) Agree that Jordan needed others, but that’s because basketball
    requires five men on a court to win. What if it was shifted to
    one-on-one? Jordan would have dominated. I’m not sure VC needs to be a
    five-man game — particularly if the LP is only paying for one player.
    Certain VCs may indeed work better in teams. This sort of thing,
    therefore, would not be for them.

    2) I think the portfolio effect may be overrated. After all, most VC
    portfolios are money losers. So long as a VC has an associate, an
    assistant and a CFO-type (outsourced?), it can work. Look at Tugboat or
    Kepha. They don’t really have returns yet, but the process is
    manageable.

  • Here’s a radical idea for reinventing VC. How about stopping thinking like sheep and piling on the same small space making it useless for everyone. e.g. Web 2.0 and potential Google acquisitions!

  • I like where you are going with this.

    One other thing to consider is that under the current system GPs are incentivized to invest their entire fund within the permitted time frame, even if they do not see the best opportunities. With a structure like the one you described, VCs would only want to do the best deals since they do not have a committed fund they are “trying to put to work.”

    In a partnership model the group often tries to gain exposure to a variety of trends or industry sub segments. If the VC was focused more on their individual record, they would focus more on the actual company they were investing in than gaining exposure to trends, something that would benefit the LPs, VCs and companies.

  • One of the issues that needs to be tackled is VC compensation and incentives. In the “radical” plan you provided, your VC took a compensation scalping all the way down to a base salary of $1M before achieving any results. No wonder people think the model is flawed. How many of these same VCs compensate the CEOs of their portfolio companies anything that approaches this? Their CEOs are expected to kill themselves for $200-300k per year until they can generate a return. Even then, they are sitting behind VC preference and might have an upside on no more than 4-7% of the common shares. What’s wrong with this picture and why do LPs continue to think this is reasonable?

  • The main flaw in the plan is the idea that some VC’s have predictably
    better performance due to superior skills. Most of the data fails to
    support that view, the success rates are impossible to predict
    regardless of the school the person graduated from or past successes.

    Pierce is a star because he has superior talent, there is no analogy in
    investing, and believing that there is has caused much of the pain we
    are feeling.

    I know it is fun to talk about these things at conventions and
    cocktail get togethers but the facts show that the abilities of
    financial investors have almost no effect on their success as you
    can’t know what you can’t know.

    I would look for another beat, PE is going to have a long spell of
    disinterest just as it did through the 1940’s through the 1970’s.
    You’ll be retired on the Cape by the time the new PE boom rolls
    around.

  • Thanks for the invitation to present (1) what isn’t working for most VC’s, and (2) what can work going forward. I speak as a VC as Mgg Genl Partner in 2 funds (BioStar and MachLabs) with a history of successful liquidity events and high profits. I’ll admit we’re lucky—and that it helps to be in the medical device space—but the lessons learned work.

    This note has two parts: what doesn’t work now, and what we do that works (and is proven to do so).

    What doesn’t work now:

    1. VC’s make more money from management fees than capital gains if their total fund(s) size is >$400MM.

    2. Some sectors, such as biotech, have never made money on an aggregate basis (sources: Harvard and Duke funds).

    3. LP’s are both unable and unwilling to measure performance over a fund’s life

    4. IPO’s are at best an imperfect exit (which do you prefer, locked-up IPO shares, or cash—or J&J stock?).

    5. Venture funds >$100M are unable to seed deals.

    6. Partnering with other funds through subsequent rounds never works…I mean, NEVER.

    7. Most venture funds must invest $10-$30M in a deal in order to ‘move the meter’ if they are >$400M in size. The corollary: VC’s talk about “vision,” “creating an industry,” and “creating a company.” What they mean is that they need to invest a lot of money.

    8. No VC has the vision to know what will succeed in 5-10 years.

    9. Many venture funds which were successful with their first fund (e.g. Three Arch, Skyline, DeNovo, Delphi, Menlo) have been utter failures since.

    10. Most corporate acquirers don’t want to pay >$100M for a deal unless it is in a new strategic area; if they buy the organization, they generally throw it away and keep the product.

    11. And finally, and most importantly, the more money that you invest in a venture, the less likely it is to succeed.

    What DOES work:

    1. Small investments. Start at $25K, add as needed.

    2. Failure early—get to a binary decision quickly.

    3. Don’t pretend that you know the next $billion market. None of us does. Invest in a nice $30 million market. Expect to make money. Also expect to find one or two “blockbusters” in these “small” deals.

    4. No management.

    5. Sale to a major (especially in med devices, where there are 120-160 acquisitions per year).

    6. Total fund size <$30 million.

    7. Complete control of the investment from start to liquidity event.

    8. Liquidity events <$50M (average in Med Devices is $92 million). Forget IPO’s, “window” or “no window.”

    9. Know who your acquiror will be when you make the first investment.

    10. And, most important for IRR, fast exit (we do 2-3 years max).

  • I like to think returns are based on 3 things:
    1. Valuation at Investment
    2. Incubation (and VCs ability to help companies succeed)
    3. Exit

    As we sit today I think the major issue in the industry is the lack of exit options – traditional buyers are divesting, not buying, and the IPO window is closed for awhile. Valuations inflated the last few years but are coming back down to earth now and I think VCs do as good of a job as they ever have in helping their portfolio.

    So the issue I have with your proposal is that it doesn’t help with #3, probably makes #1 worse (more competition if everyone is indie), and, if anything, hurts #2 as even the most connected VC will have less connections to use than if he were in a firm.

    To take your argument: “If the VC’s investments are successful, both he and the LP would make more money than had they both been working under the traditional structure. If the VC’s investments fail, then the LP presumably would lose less money than had it invested in a failed fund of multiple partners.”

    This assumes an LP invests less money in just a few superstars? Assuming they put the same money to work they are going to have to invest in a few under performers also. I think the proposal further stratifies the industry and creates more competition to invest in only the top VCs, thus pushing up their salaries and fees up. When left with a mediocre partner to invest in the LP might just not invest, thus reducing the total amount of investment in the industry.

  • Any re-invention of the VC model needs to take into account the different stages of VC investment. I wonder whether a three-year model with a single VC is more appropriate for later stage investing.

    In theory, VCs should invest smaller amounts in more companies at the Series A stage, and then triage early and concentrate the larger amounts of capital on the winners in the next rounds. With only three years, can a VC risk early stage with its higher failure rate? Also, the VC may not have time (or feel they can afford them time) to wait the five to seven years to reach exit (and carried interest, of course).

    In addition, we find that early-stage VC often is best played more as a team sport, given a company’s wide range of changing needs over the first few years of development. If the VC is operating independently, then the VC may not want to risk going it alone in a very early stage company.

    I am 100% in agreement that the VC model needs re-inventing. I am concerned, however, the current dynamics of the institutional investors and VCs will result in fewer VCs managing more money, which will be great for large raises by later stage companies, but may make it much more difficult for a wide range of early stage companies to get off the ground.

  • [...] is a new post over at PE Hub by Dan Primack titled, “Radically Reinventing Venture Capital,” where he provides some insight into a [...]

  • Jeff Clavier is also a 1-man shop, and he seems to do just fine at getting into all the good deals!

  • Good points, Dan. I was going to respond here, but decided to just write an entire post on it … http://reiboldt.com/?p=521

  • Basically you’re talking about the VC equivalent of National Financial. This has been tried before in the hedge fund world and it doesn’t work because of adverse selection. The “good” GPs, don’t need money. Unless there is a global, macroeconomic meltdown, they are usually closed to new investors. If you’re a “good” GP, then you make more money in the current fund structure than in this sort of unitary fund structure.

    So basically only the “bad” GPs are attracted to this model and that, of course, is not what an LP wants to invest in (i.e. a basket of “bad” GPs).

    This is why there has never been a giant roll-up and a “brand” created in the VC space (like Fidelity in the public equity space).

  • The elephant in the room is that there is still fundamentally too much money going into venture. Changing the way that money gets allocated will not fix the problem. The system simply will not support the level of capital in terms of great entrepreneurs, customer adoption or acceptable exits, except in periodic bubbles. The structure proposed could address the overcapitalization issue, but only if universally adopted (to FN’s nationalized venture capital comment above). The LP, however, will take on a much greater responsibility for active management of the GP’s by constantly culling and adding new GP’s. This is an area where few LP’s have shown great aptitude.

    The number of memebers in the new model partnerships is less of an issue than their approach. Some 1-person shops, like Maples & 1st Round, have taken a micro-financing approach which seems to have borne some fruit, while others, like Catamount & Tugboat, have taken a more traditional approach without any exits of note.

  • Dan,
    Great post. Today’s Venture capital has been struggling for sometime with ony a few small hits and very handful of big returns. The problem is that entrepreneurship is stuck because of venture capital. We need to modernize the venture capital business so entrepreneurs can get busy. I am seeing more early stage creative development then in years past. The entrepreneurial process will never die but it will evolve. These are the pains that we are seeing now with startups. The capital markets are a mess and with no liquidity market today’s venture capital firms are spinning their wheels. The good news is that capital markets are efficient and will work around the bottleneck we are seeing.

    http://furrier.org/2009/01/07/new-venture-capital-model-is-coming-limited-partner-investors-seeking-new-avenues/

  • This is a joke, right? What makes you think that a guy who’s done well will continue to do so? Have you ever read any studies on fund manager performance? Everyone knows, although refuses to admit that past performance in a chance business like VC is no indication whatsoever of future performance.

    If you don’t believe me just look at the studies already out there. Sure VC’s will want you to believe that they are “special” and they can “smell” a deal miles away — and some will have a past that is compatible with that statement. But the key question is: do they have a future that is compatible with that statement? No way.

  • [...] Radically Reinventing Venture Capital [...]

  • There are several examples of individually successful (apparently) investors at the “super-angel” & “small VC” (<50M) size. however there are just as many examples of great teams at larger siR funds that are also doing well. I’m not sure that individual vs. team structure is the best differentiating variable.

    However, a MUCH greater factor in my opinion is simply domain expertise & focus. Having been an angel investor and advisor in ~20 startups over the past 4 years, and a geek who has worked in tech for ~20 years, I’m continually amazed at how many VCs investing in consumer internet companies — at some of the biggest names in VC even — have very minimal qualifications in engineering, online marketing, UX, & other domain-specific skills. similarly, I see very few of them at conferences & events in relevant areas like Search, Social Networking, E-Commerce, Online Marketing, Web Analytics & Metrics, etc. most of them are too busy hanging out on Sand Hill Road to get on a plane & go learn about the industry.

    The elephant in the room is NOT that some VCs have crappy selection & performance. The elephant is that many of them are woefully inexperienced to be investors ln sectors they know absolutely nothing about.

  • [...] Read more:  peHUB » Radically Reinventing Venture Capital [...]

  • [...] Primack of PE Hub passes along an idea on how to revolutionize venture capital in his latest post. The idea, given to him from an unnamed Boston based VC, centers around the partner as the core of [...]

  • dan – it’s so great that you are thinking about this stuff and pushing everyone else to do the same.

    i’m not a big fan of the solo superstar VC model. there is something special about partners that make the best VCs even better.

    i think small partnerships (4 partners or less) managing small funds ($100mm to $150mm) where they have a lot of skin in the game (5-10% of the fund at least) with much smaller mgmt fees is probably a better answer.

    fred

  • [...] week, I responded to a post (PE Hub) on reinventing venture capital, and both the original post and my response struck quite a [...]

  • Don’t forget that the S&P 500 market returns haven’t exactly been huge over the same period you are considering. They are sitting flat from 2002 levels (and 1997 levels) — granted there were a couple of bubbles in between, but pick an arbitrary starting point over the last decade and I’ll bet you draw a downward line to today… There is more broken than the VC model.

  • Innovation is still happening, despite the broken funding model. VCs only get to ride waves (when they exist). Just like any industry which is at its core a deal brokerage, the best will do deals and ride it out, or they may have to sit on their boards till the next set rolls in. (I suggest that the VCs start companies while they wait. I am sure there are tons of angel investors out there who will support the $1M salary + Associate + Assistant) :-)

  • Dan – I love how this post has challenged us all to think a little out of the box, but creating a fantasy league of VCs directly beholden to LPs seems more than unlikely. The argument does inspire a concept though – the Venture Capitalist in Residence, or VCIR. In this construct LPs would hire VCIRs to advise on allocations (in addition to or in place of private placement agents) and also make individual investments directly on behalf of the LP. However,it’s more likely we’d see the VCIR role sprout at public money management firms like T Rowe, Fidelity and Legg Mason because they’ve been locked out of the IPO market and are looking for direct growth investments. Institutional investors like these have made a few “vc” like investments (notably T.Rowe’s and Fidelity’s investment in Slide.com). Could a dedicated VCIR role be far off?

  • Dan:

    While I agree on the main subject that VC industry has to reinvent itself, IMHO the solution suggested seems quite impractical on many dimensions and has significant slants of a planned economy. The root cause of the problem has been bull market performance has confused the distinction between beta (systemic) and alpha (skill based) returns. As with other markets LP put more and more money and will naturally react by starving. Thankfully enough this will ensure many “VC” firms disappear from scene and bring orderliness and hopefully returns. One other development could be that LP sophistication could improve to the point that they would gang up pull plugs on poor performers early/mid way in a cycle..

  • Dan

    You have sparked a great, and long overdue, conversation. Thanks.

    Some thoughts that the discussion brought out.

    1. the evergreen approach may help with some innovation in exits. Exits to a VC are always sale or IPO. Yet there are probably an order of magnitude more great entrepreneurs who have built companies that do, or could, pay those old-fashioned things called dividends. I am CFO of one that has provided a 45% annualized return to investors over the last 25 years by paying dividends. Today dividends are between 5 and 10x the original investment size. Investors get a 10x exit EVERY YEAR. We have created a small, closed, but operable, market for the shares for those few investors who need to exit (most don’t want to). Some means of changing the 10 year closed fund structure to allow for some creativity in getting outsized returns to investors that don’t involve sale or IPO could go a long way towards making capital available to great entrepreneurs who don’t have a sale or IPO in mind, but want to make boatloads of money for investors.

    2. the point was made above about looking more broadly at opportunities than the traditional IT, biotech and now clean-tech arenas. I can’t agree more, but once again, the current 10 year closed end fund structure makes it difficult as very few industries can offer the opportunities required to meet that 10 year fund. Instead of trying to find more square pegs to fit in the square hole, let’s have some different fund structures for venture investment that allow us to go after round holes too. Also, this problem falls squarely on LP’s. LP’s need to be willing, and able, to solicit and review opportunities for fund investments from emerging managers and with structures or industries that look a bit different than the norm. Until LP’s start to either pull back from today’s VC model (thus having less capital chasing the few good deals in the 3 spaces mentioned above) or spread that capital across managers willing and able to look at other industries, those LP will continue to obtain poor returns. The LP’s are enabling poor performance and need to look at themselves.

    Thanks for the conversation.

  • Dan,

    The biggest issue in VC right now is that it is overwhelmed by subprime deals, and it will take a while to flush that out. VCs will need to fundamentally align with the needs of entrepreneurs and support the creation of real companies (not technologies) that have the potential to achieve a trustworthy IPO. We need to get VC off the mindless gamble on early exits that in this climate rarely produces exits that change the outcome of the fund substantially.

    I am not sure exactly how LPs can force VC to change now (not sure what their legal paperwork looks like) except for them to force VCs to provide transparency to both the LPs and the entrepreneurs about their performance as a firm, fund and individual GPs.

    Currently, just like in government where we want more people to participate in the legislative process and vote, in VC we need to make sure we make it more interesting for prime technologists to leave their cushy jobs at established companies to create new innovation. A 175K salary, unfavorable valuations and inexperienced VC as a board member are not the mix that attract great entrepreneurs, just subprime ones.

    VCs, just like politicians, forget that they exists by the virtue of great entrepreneurs wiling to go through the hassle of entrepreneurship. Without great entrepreneurs there is no viable returns, not for a VC or an LP.

    I personally am more attracted by smaller VCs that are just as hungry as the entrepreneurs and still need to prove themselves, and so I like your 1 GP firm idea, but usually with a small fund comes a smaller runway that may not be able to support cross silo/ecosystem innovation.

    So, for now, I would think LPs should:
    -Cancel 50% of their outstanding commitments to VC (as they are oversubscribed in the same investment, subprime, investment classes)
    -Build new VC recruitment criteria, taking into account real business experience and an accurate assessment of the investment criteria (segment, stage of entry etc), map it out.
    -Demand transparency in the performance of the Firm, Fund, and GPs (remember Private equity invests in Private companies, usually not with private funds, so privacy should not be an issue)

    I am sure we can devise more tangible advice to LPs in further discussions, but I want to make sure the feedback you, Dan, get is not just centered around the wallowing in the current VC mechanics as they are secondary to attracting new prime entrepreneurs to the process.

    Thanks,

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