Should LPs allocate capital to funds based on brand reputation or on risk-adjusted return potential?

Harry Stebbings · Sep 12, 2022

LP incentives are the thing most in need of changing in venture, because salary-and-bonus compensation makes it rational for LPs to back brand-name multi-stage funds returning 1.6-1.8x over a potential 5-10x from a small manager

LPs have no upside participation either way, but backing the brand carries no firing risk while backing the small manager does

24:24 20VC: Why 95% of Venture Capital is Not Really "Venture Capital" | The Five Core Levers Needed To Assess Risk and Price a Startup | The Future of Venture; Who Wins, Who Loses, What Happens to the Crossover Funds with Will Quist, Partner @ Slow Ventures

Harry Stebbings · Oct 10, 2022

LP allocators favor large brand-name funds over smaller managers with better multiple potential because they are paid salary and bonus with almost no upside, so career risk dominates return maximization

LPs he speaks to concede the opportunity cost but say they won't risk their job on two unknown people when they could pick Andreessen

33:23 20VC: Altimeter's Brad Gerstner on Why Supercycles and the Powerlaw is the Most Important Thing In Investing, Why Portfolio Diversification is the Opposite of Risk Mitigation and The #1 Question Brad Asks All New Recruits

Harry Stebbings · Oct 21, 2022

LP allocation decisions are driven by career safety rather than returns because LPs are paid salary and bonus rather than carry, so they prefer a 1.6x in a famous name over a potential 7x in an unknown

An LP won't get fired for backing a celebrated firm that fails, but will be blamed for backing an unknown emerging manager that blows up

16:36 20VC: Why 75% of Active Investors Will Disappear in the Next Few Years, The Death of "So So" Venture Firms is Coming, The Rise of Blackstone of Venture Firms and What That Does To Venture Returns, How the World of LPs is Broken and more with Kyle Harrison

Harry Stebbings · Nov 21, 2022 · hedged

LP incentives may be misaligned: allocators accept a lower multiple from a brand firm like Andreessen because they won't be fired for it, but would be fired for backing an emerging manager who goes off plan (interviewer's stated concern)

Career risk for the individual allocator, not returns, drives the decision

Scope: framed as a personal worry

37:08 20VC: Semil Shah on The Biggest Mistakes VCs and LPs Made Over the Last 24 Months, Why LP Churn is Coming, Core Lessons on Scaling from $1M Haystack Fund I to Today and How To Find, Win and Manage LPs as an Emerging Manager

Miles Dieffenbach · Aug 4, 2025 · hedged

Brand-driven LP allocation stems from an incentive problem: some allocators are incentivized to park capital in brand-name funds because doing so won't get them fired

"No one gets fired buying IBM" — career safety, not risk-adjusted return, drives the decision, unlike someone who puts their name on their work and gives 150%

Scope: applies to 'certain people', not all LPs; framed as his read on the industry's incentives

51:10 20VC: Inside Carnegie Mellon's $4BN Endowment | Why 90% of LPs Shouldn't Invest in VC | The $140BN Problem with Multi-Stage Funds | The Hidden Math Behind DPI, TVPI, and Illiquidity with Miles Dieffenbach

Harry Stebbings · Jan 20, 2025

Deploying $300-500M a year into venture makes great returns almost impossible, because the top three or four funds absorb only ~$80M and emerging managers can't absorb the rest without oversizing checks

You can put ~$20M into each of three or four top names and ~$10M into five emerging managers, which still leaves $170M+ that has to go into large funds

Scope: typical US endowment annual venture budget

39:58 20VC: Why Large Seed Rounds Increase the Chances of Success | When to Sell in Venture | Why Multi-Stage Firms Do Not Do The Work | Is Europe Totally F****** and Why AI Means London Can Compete with the US with Hussein Kanji

Harry Stebbings · Mar 28, 2025

Much LP allocation into large multistage funds is driven by deployment budgets rather than conviction in the opportunity

LPs come to his office with hundreds of millions a year to place, can only get small allocations into tier ones, and say they have to put the remainder into multistage funds because it's their budget

47:50 20VC: Why Traditional VC is Broken: How VCs Learned Nothing from 2021 | Why LPs are More Important than Founders & Advice to Emerging Managers | Bull Case for Bytedance & Why TikTok's Ban Doesn't Matter with Mitchell Green, Lead Edge Capital

Roger Ehrenberg · Feb 19, 2024

Traditional LP structures are completely broken, and traditional LPs have been the enablers of venture's problems at both extremes — funding too many undifferentiated new firms and letting venerable firms raise funds 12-15 on 2-and-20 without DPI since fund four

Managers who haven't returned capital in a generation are still collecting eight-figure fee streams because LPs keep re-upping

Scope: applies to traditional institutional LPs

14:42 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

Mitchell Green · Mar 28, 2025

LPs are substantially to blame for mediocre managers being able to scale AUM despite poor returns

47:48 20VC: Why Traditional VC is Broken: How VCs Learned Nothing from 2021 | Why LPs are More Important than Founders & Advice to Emerging Managers | Bull Case for Bytedance & Why TikTok's Ban Doesn't Matter with Mitchell Green, Lead Edge Capital

Sarah Guo · Apr 28, 2023

The LP landscape is clubby and, much like venture, most LPs lack individual conviction and simply follow bigger brands; more independent thinking would improve it

She observed brand-following rather than independent underwriting while raising her own fund

38:44 Lps lack independent conviction and follow bigger brands in a clubby landscape

Mitchell Green · Mar 28, 2025

The best LPs are willing to under-deploy or downsize their venture allocation when the opportunity isn't there rather than hit a fixed number

There is no obligation to put a billion dollars into venture every year; if a billion is too big, the right answer is to do smaller

48:09 Best lps downsize allocation rather than force a fixed deployment number

Harry Stebbings · Mar 28, 2025

Firms like Andreessen Horowitz have proven that at scale brand matters more than performance

49:19 Brand outweighs performance at scale proven by a16z

Mitchell Green · Mar 28, 2025 · hedged

It is too early to conclude that brand beats performance at scale — the verdict will come over the next decade or two

49:27 Verdict on brand vs performance at scale is not yet known

Harry Stebbings · Oct 21, 2022

LPs are loyal to a fault: once a fund returns 3x, it is very hard for them to decline the next one

Receiving cash back creates a felt obligation to re-up

16:11 A prior 3x return creates lp loyalty that makes declining the next fund hard

Beezer Clarkson · Oct 18, 2023

An LP working inside a firm on a three-to-five-year tenure horizon will take a different risk appetite than one whose mentality is to find great managers and stay with them for a long time

Average CIO tenure is short (a friend told her three to five years), so the time horizon of the individual diverges from the fund's horizon

33:54 Short lp tenure horizons produce different risk appetite than long term manager relationships

Jason Lemkin · Nov 3, 2023

The thing LPs least want is an undifferentiated manager; they will back people with no conventional credentials if they perceive a genuine edge, rather than a standard Sand Hill VC who works four and a half days a week

Perceived edge is what LPs underwrite, so they will cut corners on credentials to get it

25:13 Lps value perceived edge over conventional credentials and tolerate unconventional managers

Harry Stebbings · Aug 4, 2025

LPs who allocate for brand rather than performance are making a poor risk-adjusted decision given the opportunity cost of their capital

He regularly tells LPs who insist on being in Andreessen, Sequoia or Index that other names would deliver better risk-adjusted returns on the same cash

50:48 Brand driven allocation sacrifices risk adjusted returns