April 25, 2024

225. Seed Crust: This is the Seed Crust

225. Seed Crust: This is the Seed Crust
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Season 4

Text your thoughts directly to Rich.

Distributions back to LPs dried up. LPs slowed down their fund investments. VCs had to slow down. The cycle feeds itself.

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Transcript
WEBVTT

00:00:01.000 --> 00:00:05.818
Let's keep swimming upstream and talk about how this impacts the LP side of the business.

00:00:05.979 --> 00:00:09.038
LPs, limited partners, those are the folks that give the venture funds money.

00:00:09.839 --> 00:00:12.028
Fund distributions dried up.

00:00:12.528 --> 00:00:20.239
Distributions in 2023 were down 64% compared to the long-term trend line from 2010 to 2020.

00:00:20.809 --> 00:00:26.268
Think about it this way, investors in venture funds that are used to getting back, say a dollar.

00:00:26.838 --> 00:00:36.762
Are now getting back 33 cents and being told,"the other 67 cents is coming your way eventually." Imagine if you were expecting to get a dollar and you got 33 cents instead?

00:00:37.152 --> 00:00:38.292
What are you going to say to that person?

00:00:38.652 --> 00:00:47.862
What you're going to say is, if you're slowing down on your distributions, I'm slowing down on my distributions." And so LPs then have slowed down.

00:00:48.371 --> 00:00:52.301
And you can see this with the years between closings for venture funds.

00:00:52.902 --> 00:00:59.561
During the 2021 madness, we're hearing of some funds that we're raising and deploying capital in 12 months.

00:00:59.561 --> 00:01:04.242
And to any gen extras out there such as myself, you will remember the.com boom.

00:01:04.701 --> 00:01:10.042
That pace of investing in 2021 is awfully a lot like 1999 era.

00:01:10.841 --> 00:01:12.611
What happens when the LP slowdown?

00:01:12.772 --> 00:01:15.352
then the GPs, the investors, have to slow down.

00:01:15.742 --> 00:01:20.182
Aumni estimates that the from velocity has been cut by more than half.

00:01:20.632 --> 00:01:25.072
This is the average number of investments that a venture capital fund participates in per quarter.

00:01:25.581 --> 00:01:29.022
At the peak, it was 4.6 investments per quarter.

00:01:29.441 --> 00:01:31.602
And it's down to 2.1.

00:01:32.602 --> 00:01:33.831
Add all of this up.

00:01:34.331 --> 00:01:36.462
You have more Steed funds than ever before.

00:01:36.492 --> 00:01:38.292
Series A is spolied for choice.

00:01:38.352 --> 00:01:39.852
Series A raises the bar.

00:01:39.882 --> 00:01:41.891
Startups spend more time in the Seed phase.

00:01:42.102 --> 00:01:44.621
Startups come back to investors for inside rounds.

00:01:44.981 --> 00:01:48.432
VC's shift allocation from new checks to follow on checks.

00:01:48.671 --> 00:01:51.221
There's less capital available for new checks.

00:01:51.352 --> 00:01:52.822
Some venture funds are shutting down.

00:01:52.912 --> 00:01:54.861
There's less capital available overall.

00:01:55.191 --> 00:01:59.331
Meanwhile, cash on cash returns, dry up LP, slowed down their pace.

00:01:59.361 --> 00:02:00.891
So VCs slow down their pace.

00:02:01.102 --> 00:02:03.621
So startup funding slows down again.

00:02:04.102 --> 00:02:08.901
Resulting in startups, spending more time in the seed phase, coming back to their investors.

00:02:09.051 --> 00:02:14.042
Investors are allocating even more money for follow-ons making even less money available for new checks.

00:02:14.342 --> 00:02:17.671
And on, and on, the cycle goes.

00:02:18.472 --> 00:02:19.942
This is the seed crust.