📶 The VC ecosystem broke the LP ecosystem

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My entire timeline has been taken over with Barbie vs. Oppenheimer memes. None of them are funny.

Are people actually interested in seeing these movies, or have they just been meme’d into seeing them?

Switching gears.

In this piece, we’ll break down why LPs are pulling back on venture investing, share how we’re using Notion AI to help speed up our content strategy, we’ll give an example of old-school due diligence, and we’ll share the best resources we found online over the past week.

If you think we’re right, wrong, way wrong on any of the stories this week, let us know in the comment section.

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This Week in Venture

The VC ecosystem broke the LP ecosystem

Frank Rotman wrote a great breakdown of what’s going on between VCs and LPs today.

This is a must read for any GP that is raising, and it breaks down the factors influencing why limited partners are making it much harder to fundraise.

Why it matters: Venture capitalists don’t deploy their own money, and just like startups, they have to source their capital in order to have a seat at the table. Limited partners (the institutions and wealthy individuals they source this capital from) have pulled back and made it harder to raise.

The harder it is for funds to raise, the less capital is available. Talk to any GP today, and you’ll hear this is the case.

Frank points out in his thread some of the reasons why.

• Fast deployment + chasing the wrong deals: This subject has already been covered, so we won’t beat a dead horse. The lesson? FOMO investing might work in the short-term, but it won’t in the long-run.

• Increased number of markdowns and write-offs: Portfolio companies that raised at ridiculous valuations are down bad, and their investors are hurting equally. We’ve seen layoffs across the board, and a growing number of companies are shutting their doors. The ones that are staying alive are being forced into investor-friendly terms that can wipe out existing shareholders, or at least reduce return expectations.

• Lack of differentiation: The more you’re around venture, the more everything starts to sound the same. The strategies used, the clothes people wear, even the way they talk, it all sounds the same. The irony in all of this is that venture capital only operates because of outliers - people and companies that, by definition, do things differently than others. Funds with cookie cutter strategies are dying off, and LPs have no interest in back another generalist fund with no differentiation.

What happens next: As an LP, you have a lot of options of where you can invest your money.

You can invest in public equities, commercial real estate, private credit, or any alternative that matches your risk-reward profile. For many years, LPs wouldn’t touch venture capital due to the illiquidity, risk, an unknown distribution schedules (shoutout to the Yale endowment for changing this). All of that had changed over the past few decades with venture becoming a larger part of many LPs’ portfolios.

When rates were near zero, a lot of potential options were off the table because they couldn’t yield enough to justify the risk. Now that the free money is gone, the appeal of certain asset classes (like venture capital) has dried up with it for many LPs.

So what happens from here?

We think three things:

1. Companies will be forced to build more sustainable forms of growth. Grow at all costs is dead, and the days of lighting money on fire to make a single metric go up are behind us.

2. More funds will be forced to reduce fund sizes. LPs have tough decisions when it comes time to re-up, and not all of them will choose to. GPs will be forced to either reduce the size of their fund (and their management fees) or test their luck in a brutal fundraising environment.

3. Returns will be better than the past three years. LP investing depends on vintages as much as anything else. The combination of price compression and increased emphasis on capital efficiency makes for a better investing environment. As a GP, it will be harder to secure capital, but it should be easier to drive returns.

Read Frank’s entire thread here.

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Links We Like

🧠 How I Got Up to Speed In VC: What worked for me to help me learn fast

🤝 How I Built a VC Network From Nothing: How I got people to notice me starting in a non-target city

🛡 When to Dig a Moat: Packy McCormick details when it’s the right time for companies to think about their moat

📧 How the Best Newsletters Grew to 50k+ Subscribers: Peter Yang shares what has worked for the biggest newsletters

🎥 Mr Beast Masterclass: The biggest YouTuber in the world gives game for ten minutes

📝 Reforge Artifacts: Reforge shares their template library so you never have to start from scratch

📊 A Bootstrapped SaaS Journey to $10K MRR: The founder of Bannerbear shares the good, bad, and the ugly of how he reached $10k MRR

📶 The Road to $1M ARR: A bootstrapped founder documents his journey

Have an article you like that we should include in this section? Let us know by responding to this email or sharing a link in this Slack channel.

Tweet of the Week

Bring back old-school DD

Everybody makes bold claims about their due diligence process.

Maybe the old way worked better.

Together with Sydecar

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Member of the Week

David Gilgur (Partner @ Blue Lake)

Elevator pitch: I am a partner at Blue Lake, we are a London based VC with the focus on early stage immigrant founders. We now invest out of a syndicate but now taking the next step and setting up a VC Fund with the same thesis. Looking to learn, meet startups fellow VCs and LPs.

Say what’s up and intro yourself in Slack.

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- Clay and Tyler