#72 What LP's Are Thinking About VC Right Now

Hi Everyone! 👋 Welcome to the new members of @TheFundCFO crew! We recently released our New VC Fund Playbook + Model Downloads @ Streamlined.Fund! Re-linking our top 2023 posts: #67 Top VC CFO Posts & References of April, #65: WTF is Going On in VC (+ New Fund Model Data) & #60 Emerging VC Fund Tech Stacks!

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“All my best successes came on the heels of failure.” -Barbara Corcoran

What LP's Are Thinking About VC Right Now

Where is the world going and what does that mean for my investment portfolio? That is the general question all types of investors are asking right now! We’re reading headlines and digesting macroeconomic / industry data to understand what it all means for our various investment strategies.

Given all the uncertainty, LP investors are being a lot more cautious with their VC investments right now. We wrote more about this recently in #65 WTF is Going On in VC and #62 VC Market Data for Fund Model Updates. In addition to real-time data from portfolios, LP investors and VCs are digesting some of the following headlines:

• “Flat and down rounds are on the rise. There could be ‘a lot more on the horizon’” -Anne Sraders, Term Sheet

• “Silicon Valley Startups Brace for a Summer of Pain (More than 400 unicorns haven’t raised new funding since 2021)” -Lizette Chapman, Bloomberg

• “Why a Stripe down round would be a ‘good lesson’ for startups” -Term Sheet

Navigate 2023 w/ Direct & Realistic Communication re VC Portfolios

We still talk to a lot of LP investors given we were full-time in that world for a decade. The common message we have heard and still hear today is that direct & realistic communication regarding VC portfolios is preferred, especially in this market.

This applies up and down the stack, meaning down to founder/VC communication, and up to LP investor communication to their investment committees and foundation boards of directors.

Clearly communicating data and key metrics will be more important than ever in 2023. For founders, it will help drive productive conversations with both existing and new VC investors. For VCs, direct communication to LPs will help build confidence and trust that you’re taking a realistic view of your portfolio and the broader environment.

LPs are thinking that many VCs got ahead of themselves in the past few years. The VCs that clearly communicate data re their portfolio and appropriately manage it through this environment will stand out! 

Additional Insights From Signature Block & Regan’s Substack (Lattice)

As we looked back at past posts and current writings on these topic, we wanted to a highlight a few resources and quotes that stood out. First, from our friends at the Weekend Fund / Signature Block:

• On LP updates: “We owe it to our LPs to keep them informed on how we’re investing their capital. It also serves as an opportunity to put LPs to work by supporting the portfolio and remain top of mind for future deal flow. It’s also valuable exercise to get out of the “micro” of day-to-day investing, and have a “macro moment” to reflect on the state of the fund.”

• “Go beyond the basics. Of course you should introduce new investments, share updates from the portfolio, report performance metrics, and other key updates from the fund, but the best updates go a step further to educate and inform LPs. This might include your analysis on the market, perspective on emerging trends, or learnings from experiments.”

• “Be authentic. In general, people gravitate toward authenticity. Writing with personality is more engaging and magnetic. LP updates are an opportunity to share your unique voice and build your fund’s brand.”

Regan’s Substack, which recently shared some great insights that parallel / many conversations we’ve had with other LPs:

• Compared to 2018, “the macro situation is objectively worse. Interest rates are rising, which generally decrease investment in VC broadly. There is also a huge amount of macroeconomic uncertainty. And VC faces the ‘denominator effect’ where some institutional LP’s find themselves over-allocated to venture due to declining equity prices. There are significantly more macro headwinds for managers than there were last cycle.”

• “LP’s need to believe that real applications of [insert your sector’s] technology emerge. And that these produce venture-scale outcomes.”

Fun Picture of the Day: Balos Lagoon (Courtesy of Boater Weekly)

That’s all for today folks! Thanks for your support and spreading the word! Share this on Twitter or LinkedIn to help grow “the crew!”