VCs Feeling the Pain of Newly Poor LPs

It’s no longer a remote fear. For the first time in the industry of venture capital, investors are finding themselves hamstrung by cash-crunched LPs.

The evidence is stacking up. In the last couple of weeks, I’ve learned of three fund “adjustments” — vintage 2007 and 2008 funds that closed yet are now being forced to downsize. I’m also aware of a fourth fund now having to run every new investment decision by its base of LPs. (More on these to come.)

Even DAG Ventures — a venture firm that has distinguished itself by raising money quickly and deploying it nearly as fast — has slowed down its pace, and not necessarily by choice, says a venture co-investor.

The firm, which has raised a stunning $1.425 billion in LP commitments since 2006 and was investing in roughly four companies each month for much of that time, has been publicly tied to just three financing events since October, and is “definitely acting now like they’re under capital constraints,” says the VC, who asked not to be named.

DAG’s managing director John Cadeddu declined to comment. Another source close to the firm says it’s been making capital calls “without issue” in recent months. 

One thing is for certain; LP troubles are impacting everyone at this point. “It’s getting to be brutal,” says Robert Hofeditz, a partner at the San Francisco-based placement agency Probitas Partners. “Top-tier LPs used to mean foundations, endowments. Now, it’s anybody who has money.”

Given the perfect storm facing many institutions like Harvard, Yale and UC — battered portfolios along with standing obligations to underwrite good chunks of their schools’ annual operating expenses — that list doesn’t feel very long these days.

Everyone is “hesistant to make capital calls” as a result, says one Valley VC whose firm has committed just half its current fund.

“You don’t want to know if your LPs are going to back out. It’s almost like the don’t-ask-don’t-know school of venture capital. If you don’t know, you can comfortably tell everyone that your LPs are fine. What do you do otherwise? No one wants to sue.”

Adds the VC, who has worked in the industry for more than a decade: “I’ve never [before] heard of an LP failure to make a capital call because the money just isn’t there. Before late November, early December, it just wasn’t a risk that anyone thought about.”