The venture capital industry is starting to look like McDonald’s on a Sunday morning: Long lines of patrons are waiting for a seat.
With elite VCs raising smaller fund sizes, there isn’t enough room for existing LPs to re-up at their previous allocation, let alone allow new LPs to receive any allocation at all. What started as a VC overhang has transformed into a VC mega-overhang for the few elite venture groups raising their umpteenth funds.
The “Access Challenge” dominates cocktail party chatter. Some LPs are complaining about small allocations, while others are crying over lack of any allocation.
Frustration is high. A large ($200 billion) European LP recently turned red after receiving a call from its U.S. gatekeeper. “Congratulations,” the caller said, “you have just received a $1.5 million allocation to fund X.” An allocation this small wouldn’t move the needle, the LP complained. “Understood. And you have only 72 hours to respond,” was the gatekeeper’s prompt answer.
Fun with Numbers
Because the Access Challenge looms so large, LPs are aggressively seeking out newer firms (though rarely first-time funds). The smart money is looking for Roman numeral II or III firms in the hope that cozying up to these next-generation firms will create an Access Challenge for the next generation of limited partners. These newer VC groups offer some LPs the ability to make commitments of $10 million or more, with a more welcoming, flexible and accommodating approach to partnering for the next 20 years.
The logic of backing the “Next Generation” is valid. It turns out that venture capital is arguably more about vintage year than manager selection. How else could one explain the colossal losses of so many brand-name firms across multiple funds during the down cycle? In the words of one LP, “All VCs are really good at losing money, and some are marginally better at making money.” So Access Challenged LPs are clamoring for the newer names. They are driving past McDonald’s in favor of the smaller, independent restaurants serving a similar offering without the pressure of placing an order while standing in line and expecting better service. Dinner at the VC restaurant is a 10-year affair.
Turns out the McDonald’s analogy is not lost on LPs. The Access Challenge comes with “No Due Diligence” and “Exact Change Only” signs. More than one Access Challenged LP was turned away recently because it dared to ask some simple questions or asked to deviate slightly from its slotted amount. In other cases LPs bemoan the loss of their ability to extract even moderate terms which until recently were “required” T’s and C’s.
No Questions, Please
Meanwhile, evaluating newer groups is a big challenge to some LPs because they got out of the habit of conducting rigorous due diligence. That’s how they became Access Challenged in the first place. Perhaps they were asking questions like: “What is your investment strategy and how has it shifted over the last cycle?” These questions are not allowed in the drive-through lanes of McDonald’s. Those who ask them lose their turn.
A fork has appeared in the road and many LPs are taking it. LPs are shuttling from one venture group to the next, applying their own version of a “barbell” strategy: Have a quick meal at McDonald’s, but spend more time at dinner at a new restaurant across the street. This is probably the right answer. Invest across the asset class or don’t invest at all. Let’s just hope this will be a good vintage year.
Bart Schachter and George Hoyem are managing partners at Blueprint Ventures, an early stage firm based in San Francisco. Schachter focuses on communications and IT infrastructure, wireless technologies, nanoelectronics, software, and communications semiconductors. Hoyem focuses on software, wireless, security, and IT and communications infrastructure. They may be reached at