The difficult 2020-21 venture vintages are causing newer, less-committed LPs to exit the market. This shakeout is seen as a positive development by long-term investors, as it reduces market noise and undisciplined capital, which is healthy for the ecosystem.
While the market trends toward sector specialization, LPs should maintain a significant allocation to generalist VCs. These funds are uniquely positioned to invest in outlier founders and "weird" ideas that don't fit into a specific thesis, which are often the source of the greatest returns.
The value of an operator-turned-VC's network and experience is finite and depreciates over time. LPs must assess how these managers are cultivating new nodes and relationships to stay relevant, as access to their original network fades years after their departure.
Given the power-law dynamics of venture returns and the difficulty of predicting winners, a viable LP strategy is to participate in every co-investment offered by trusted GPs. This portfolio approach increases the odds of capturing one of the few breakout companies that drive all returns.
In a bull market, it's hard to tell if a GP is skilled or just lucky. A downturn reveals their true discipline regarding valuations, capital deployment speed, and how they support founders through down rounds, providing LPs with robust underwriting data.
Most US LPs have "put pencils down" on China due to geopolitical risk, creating a capital-starved market. For investors willing to do the work, this presents an opportunity with less competition and more reasonable entry valuations for a pool of incredibly hard-working founders.
A growing frustration for LPs is the tendency for GPs to breach their stated "hard cap" by asking for last-minute increases. This practice undermines the credibility of the fund's size strategy and turns a key underwriting parameter into a negotiable figure, perverting the term's meaning.
Rather than competing with mega-firms to lead rounds, small or solo GPs can secure allocations in top deals by being a complementary, neutral "Switzerland" investor. This strategy involves writing a smaller, non-threatening check as the second or third investor on a cap table.
To manage over-allocation from giants like SpaceX, LPs recategorize them from "venture" to a "quasi-public" or general equity bucket. This acknowledges their different risk profile and allows LPs to continue investing in new early-stage funds without breaching portfolio targets.
The "hit-by-a-bus" risk for a solo GP, while real, is less catastrophic in venture than in control-oriented private equity. Venture investments are small, non-control positions. If the GP disappears, another entity can manage the stake, as the company’s success relies on later-stage investors.
The most valuable LP-GP relationships are built during "off-cycle" meetings, intentionally scheduled outside of busy conference seasons or AGMs. These focused, low-pressure touchpoints lead to more candid conversations and compound trust over time, ensuring the LP gets the first call.
While mega-unicorns like Stripe have private liquidity options, their failure to IPO removes a crucial market benchmark. This uncertainty about public market appetite poses a significant liquidity threat to the next 25-50 companies in an LP's portfolio, which lack the same private demand.