![]() Frankly, it's fucking dumb, but institutional LPs aren't the cleverest investors in the world. That means you have GPs basically always raising capital instead of focusing on deals and LPs committing capital before DPI is known on the last fund. This situation is compounded by the fact that 10 years ago, the average time between fund raises was more like 3.5 years. They're asset allocators, and when it comes to PE and VC, they're essentially gambling. This generally results in lower DPIs for follow on funds than for first funds, but most investment consultants, endowments, foundations, pension funds and family offices simply don't invest in first-time funds (mostly because those funds don't pass operational due diligence at the investment consultants like Cambridge Associates, Albourne, or Mercer). Each subsequent fund tends to be easier to raise capital for, and as a result AUM increases. Those same LPs then make the mistake of investing in fund 2 or fund 3 before the returns from fund 1 are realized. Perversely, most institutional LPs don't have meaningful emerging manager programs, and are reluctant to back a first fund, so they miss out on a lot of this deal flow. Arguably, their best deal flow exists in their very first fund since those deals savor of the ones they would have seen right before setting up their fund. The reason? They raise more money on each subsequent fund without improving the quality of their deal flow. They tend to do less well on their second funds and less well still on their third funds. Those funds tend to do quite well on their first funds. Even if Sequoia passed on a deal, that doesn't mean it's a bad deal. They still have all the brand cache of their previous employer, they still have all the contacts, and their deal pipeline is essentially a shadow of the deals they saw at, say, Sequoia. This is generally true for PE funds as well, but it's for a very specific type of emerging manager: the principals and partners from the brand-name shops going to set up their own fund for the very first time. The only other place you see returns in VC are in new managers. If they have access to Sequoia, Benchmark, Accel, and Andreessen Horowitz, they will probably have excellent returns. It's literally the only reason I would EVER invest in a fund-of-funds. They've been closed to new investors for years. It's also true that they're massively oversubscribed. Sure, guys like Doug Leone at Sequoia and Marc Andreessen have consistently posted great returns. This is a great point and something I tell people all the time, but it doesn't capture the full story. Or be like Benchmark, have an 8-person total shop, take 30% carry, and slay. I think that's the way to scale in VC - offer downstream/upstream products -different stages, different geographies. ![]() They have scout (pre-seed), seed, early, growth, a public equity fund, a FO-style shop, operations in India, China, Europe, etc. Your bet at that point is that Tier 2/3 manager will crack top quartile or even top decile with the fund. ![]() So as a new/unknown LP you'll have to settle for Tier 2/3 managers. Funds are oversubscribed very quickly because nobody wants to skip a fund and not be able to get in the next one. When any top decile VC wants to raise a new fund, they blast it through their IR person, and their existing LPs re-up. A new LP will have a hard time getting access to the top funds. But think about it from an LP's perspective - it's the same concept. You hit the nail on the head when you say that it's about access and who you know. "Venture Capital Positively Disrupts Intergenerational Investing" - published last month by Cambridge Associates.
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