Did VC Fund Size Cuts Work?
Coller Capital last week released a survey of limited partners, in which 65% of respondents said that they expect VC fund terms to become more LP-friendly over the next two years. This was portrayed by some as a sea change in the LP/GP power dynamic, although I suggested that “LPs would have more credibility if they began insisting on changes to funds that have already been raised.” My dissent was rooted in the memory of late 2001 and early 2002, when LPs fought back against the obesity of VC funds raised during the dotcom bubble. Sixteen U.S.-focused venture capital firms “volunteered” to cut their fund sizes by an aggregate of nearly $4.5 billion, including brand names like Accel Partners, Battery Ventures and Kleiner Perkins. The argument for such cuts – which were technically agreements not to call down a certain percentage of committed capital – was twofold: (a) Valuations and investment opportunities had fallen post-bubble, so less money was needed; and (b) VC firms tend to perform better when they focus on earlier (read: smaller) investments, so this was a return to successful knitting. LPs were happy with the resulting management fee reductions, and GPs were happy that their LPs were happy (butter ‘em up for the next fundraise). All hunky dory, except we’ve never actually looked to see if fund reductions produced better returns. So let’s do that now:
