Thread by Gil Dibner 🇺🇸🇮🇱🇪🇺🇺🇦

twitter.com
2 Recommenders
2 Mentions
Recommend
Post
Save
Complete
Collect
Thread
We talk to a fair number of LPs. If we connect the dots, it seems there is a huge explosion coming. Here's how it might unfold:
First, a lot of VCs have gotten really big. I mean really big. We have heard of one case where a Fund II was raised that was 10x the amount of all the capital deployed by Fund I. Funds doubling (or more) in size from one vintage to the next is pretty common.
Second, VCs have been deploying capital very fast. That means they have been coming back to LPs for capital more frequently than those LPs modeled. LPs are not happy with this at all.
Third: But even worse, the face pace of deployment has meant: little due diligence, higher prices, low ownerships relative to fund sizes, and - often overlooked - very bad time diversification. There are many funds out there that deployed THE ENTIRE FUND at peak valuations.
Fourth, a lot of funds are either "fully baked" at stupidly high entry valuations and deal parameters or "half baked" at stupidly high entry valuations and deal parameters.
The "fully baked" ones are well and truly fracked. The "half baked" ones have a new problem: what to do now? Hold reserves for the messed up ones or make new investments that are much smaller and more rationally priced? Bad performance is already baked in...not an easy choice.
But it gets worse. Fifth, we are hearing from LPs that a lot of funds jacked up fees and carry well above the standard "2 & 20%" that ruled the industry for decades. This means that NET DPIs are going to be even worse than they would have been had the funds not been greedy.
This fifth point is key: VC greed led to historically high fee & carry arrangements which are going to coincide with historically low gross DPI ratios to put net DPIs to super low levels. LPs are not happy.
Sixth - while most funds raised big funds quickly in 2021-2022 while they still could and locked in high fees & carry - many many of them have been sitting on a ton of dry powder through 2022 and the beginning of 2023.
The fear of making new investments is understandable, perhaps, but the effect has been that a of LPs have been paying what feels like a TON of fees over the past 12 months for very few (if any) actual deployments. Again, LPs are not happy.
Seventh: These funds are now facing a real existential crisis: do they try to right-size their funds by returning capital / raising a smaller fund OR do they somehow try to make the big fat fund size that they raised work.
That crisis is made even more acute if the funds (as most funds have) have hired huge teams of new partners and junior people. They need the big fee base to keep those people, but a slower investment pace means leaves little for them to actually do.
So LPs are looking at a world of inflated fund sizes, bloated teams, very high fees/carry, and very little actual deployment in good new companies over the past 12 months. They also know that TVPIs are super inflated, gross DPIs are going to be awful, and net DPIs even worse.
For LPs, VC land is not pretty right now - and it's about to get a whole lot worse. For a lot of VCs, the only right choice is to return capital and focus on running a disciplined shop - but that is, psychologically, incredibly hard for a lot of these GPs to do. Buckle up.
Mentions
See All