225. Seed Crust: This is the Seed Crust

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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

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Let's keep swimming upstream and talk about how this impacts the LP side of the business.

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LPs, limited partners, those are the folks that give the venture funds money.

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Fund distributions dried up.

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Distributions in 2023 were down 64% compared to the long-term trend line from 2010 to 2020.

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Think about it this way, investors in venture funds that are used to getting back, say a dollar.

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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?

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What are you going to say to that person?

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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.

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And you can see this with the years between closings for venture funds.

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During the 2021 madness, we're hearing of some funds that we're raising and deploying capital in 12 months.

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And to any gen extras out there such as myself, you will remember the.com boom.

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That pace of investing in 2021 is awfully a lot like 1999 era.

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What happens when the LP slowdown?

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then the GPs, the investors, have to slow down.

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Aumni estimates that the from velocity has been cut by more than half.

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This is the average number of investments that a venture capital fund participates in per quarter.

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At the peak, it was 4.6 investments per quarter.

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And it's down to 2.1.

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Add all of this up.

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You have more Steed funds than ever before.

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Series A is spolied for choice.

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Series A raises the bar.

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Startups spend more time in the Seed phase.

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Startups come back to investors for inside rounds.

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VC's shift allocation from new checks to follow on checks.

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There's less capital available for new checks.

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Some venture funds are shutting down.

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There's less capital available overall.

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Meanwhile, cash on cash returns, dry up LP, slowed down their pace.

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So VCs slow down their pace.

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So startup funding slows down again.

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Resulting in startups, spending more time in the seed phase, coming back to their investors.

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Investors are allocating even more money for follow-ons making even less money available for new checks.

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And on, and on, the cycle goes.

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This is the seed crust.

225. Seed Crust: This is the Seed Crust

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