Are LP capital allocation decisions in venture capital driven by rational financial optimization or by non-financial and strategic incentives?
4 recorded positions from 3 people, first said Feb 19, 2024. They do not agree — the readings below are what each one actually argued.
Career risk avoidance not performance explains lp allocation to large firms
Harry Stebbings · Feb 19, 2024
Many LPs have told the speaker candidly that they care less about fund performance than about not getting fired, since they expect to have moved on in five years and retired in ten, long before performance is realized
Performance shows up in fifteen years while an LP's tenure is five and retirement is ten years out
14:19 20VC: Why VC Returns Will Get Worse, Why LP Incentive Structures are so Broken, What is the Answer to Liquidity with No M&A or IPOs, When to Sell vs Hold Your Winners & Turning $5M into $250M with The Trade Desk | Roger Ehrenberg, Eberg Capital
Harry Stebbings · Sep 6, 2024
The most irrational LP behaviour is allocating on the basis of not getting fired rather than on performance, which is why the big bank-like venture firms retain their funding supply.
Those large firms cater to an LP class that is scared of career risk or content with lower returns, even though everyone knows their numbers will be poor.
21:14 20VC: Why VC is a Ponzi Scheme Today | Why Most VCs are Bankers | Why Big VCs Ruin Startups | Why Incentives in VC are Broken | Why American Dynamism is a Tool for VCs to Raise Money with Nick Chirls, Asylum Ventures
Also on the record
Nick Chirls · Sep 6, 2024 · hedged
A large share of venture LPs are not making rational financial decisions — sovereign wealth in particular allocates for strategic reasons unrelated to financial returns.
Some LPs are incentivized on things other than performance, and sovereign wealth has strategic mandates, so a lot of market participants aren't optimizing returns.
19:53 Sovereign and strategic lps allocate for non financial strategic reasons not returns
Roger Ehrenberg · Feb 19, 2024
Corporate LPs are inherently fair-weather and cyclical, but sovereigns and the largest wealth accumulators are durable and won't leave the asset class
Corporate venture arms follow new management's innovation fashion and exit at every downturn, whereas the inexorable rise of wealth and liquidity means sovereigns must deploy capital and build durable asset allocation strategies that include venture
16:34 Sovereign and family office lps are durable across cycles while corporate lps are fair weather
Your assistant can query this graph directly — 4 positions here, 19,646 across the corpus. Add 996.fm over MCP.