On this week’s episode of the StrictlyVC Download podcast, veteran VC Aileen Lee was direct a couple of main consequence of the current boom-and-bust cycle: many firms caught in limbo aren’t simply struggling to regain their footing after elevating an excessive amount of cash at unsustainable valuations; they’ve additionally misplaced the champions who as soon as backed them.
Lee was discussing how restricted companions hesitate to criticize highly effective fund managers, fearing they’ll be shut out from investing in these corporations once more. However she imagined one factor they’d say if they might converse freely:
“Everyone needs to get into X model title fund, and they also by no means will criticize them [for fear of repercussions] . . .they most likely discuss us behind our backs [laughs].. . .However what they’d say is [that] all of the individuals who have [were] employed at these enterprise corporations throughout the ZIRP period . . . they made a bunch of crappy investments” and now they’re being elbowed out — besides that it’s too late, noticed Lee. “All [the LPs’] cash principally simply bought thrown down the drain as a result of the folks within the enterprise jobs didn’t stick round lengthy sufficient to see if the businesses had been profitable.”
It’s not the fault of those newer buyers, Lee continued. “Only a ton of individuals didn’t get educated and didn’t get any mentorship or apprenticeship got checkbooks, and quite a lot of investments had been made, and . . .there are quite a lot of orphaned firms,” consequently.
However there’s another excuse startups are being left to their very own units “and I discover this loopy,” stated Lee; in lots of instances, firms have been orphaned by a extra senior common accomplice “who led the funding – who remains to be there [at the firm] however simply stopped displaying as much as the board conferences.”
For sure firms, it’s been occurring for years at this level. Nobody did as a lot due diligence throughout the go-go Covid period of funding, and the nook reducing by no means fairly stopped when it got here to those identical investments. However it’s additionally a key cause a rising variety of firms are struggling to search out outdoors assist with exit methods, and why LPs can be justified in voicing extra frustration.
As one other longtime VC, Jason Lemkin, told this editor in late 2022 when VCs first stopped displaying up on the board conferences of startups that had been dropping momentum: “[S]houldn’t there be checks and balances? Tens of millions and tens of millions are invested by pension funds and universities and widows and orphans, and while you don’t do any diligence on the best way in, and also you don’t do continuous diligence at a board assembly, you’re form of abrogating a few of your fiduciary tasks to your LPs, proper?”
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