On this week’s episode of the StrictlyVC Obtain podcast, veteran VC Aileen Lee was direct a few 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 companies once more. However she imagined one factor they’d say if they may communicate freely:
“Everyone needs to get into X model identify fund, and they also by no means will criticize them [for fear of repercussions] . . .they most likely speak about us behind our backs [laughs].. . .However what they’d say is [that] all of the individuals who have [were] employed at these enterprise companies in the course of 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 numerous investments had been made, and . . .there are numerous orphaned firms,” because of this.
However there’s one more reason startups are being left to their very own gadgets “and I discover this loopy,” mentioned Lee; in lots of instances, firms have been orphaned by a extra senior common accomplice “who led the funding – who continues to be there [at the firm] however simply stopped exhibiting as much as the board conferences.”
For sure firms, it’s been taking place for years at this level. Nobody did as a lot due diligence in the course of the go-go Covid period of funding, and the nook slicing by no means fairly stopped when it got here to those identical investments. But it surely’s additionally a key cause a rising variety of firms are struggling to search out exterior assist with exit methods, and why LPs can be justified in voicing extra frustration.
As one other longtime VC, Jason Lemkin, advised this editor in late 2022 when VCs first stopped exhibiting up on the board conferences of startups that had been shedding momentum: “[S]houldn’t there be checks and balances? Hundreds of thousands and hundreds of thousands are invested by pension funds and universities and widows and orphans, and if you don’t do any diligence on the way in which in, and also you don’t do continuous diligence at a board assembly, you’re sort of abrogating a few of your fiduciary duties to your LPs, proper?”
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