Thread by @QEDInvestors

Market conditions are putting stress on how much
capital LPs can allocate to VC firms.

The best firms are demanding greater allocations from LPs given their performance which further strains capital availability.

Is your VC in a stable point or is it in a death spiral?

In the U.S. today there are:

20,000 LPs allocating capital to

42,000 VCs, PE firms and angels funding

126,000 private companies.

It is a giant many-to-many-to-many matching problem of LPs looking to match with VCs and of VCs looking to match with founders.

In a paper to be presented @Fintechnexus on May 26, @fintechjunkie says there are four types of VCs in a stable position.

1. Scaled VCs
2. Funds investing in non-obvious, non-derisked businesses
3. Late-stage generalists
4. Solo capitalists

Scaled VCs include @sequoia and @a16z; those investing in non-consensus alpha include @firstround and @Lux_Capital; late-stage generalists include companies like Tiger and @silverlake_news; solo capitalists include @eladgil and @HarryStebbings.

Scaled VCs help LPs put a significant amount of money
to work and they capture alpha because they invest in more than their fair share of right-hand-tail outcomes.

They generate returns with less volatility given the size
of their portfolios.

Scaled VCs are attractive to startups because capital is available through cycles, resources are abundant, and they have a large portfolio to connect dots and share advice.

Great non-consensus firms generate significant alpha due to the unlimited return profile of early stage
non-consensus startups.

They offer LPs a diversified exposure to a different set of
companies and win deals based on factors outside of price.

Many startups require an early investor to suspend disbelief to see the possibilities of what they’re building.

Non-consensus firms are a great fit for startups that require an investor to believe a talented team will solve a problem, given enough time and money.

Late-stage generalists are attractive to LPs because of the risk-return profile of private companies that will soon become public companies.

LPs can more predictably get capital return and shift strategy as the environment changes.

Founders like late-stage generalists because of the help
they provide navigating scaling challenges and the
ultimate path to liquidity

The late-stage specialist, which has experience in both, competes based on price and terms.

The solo capitalist allows for the LPs to be active members of a community. By only accepting small checks, solo capitalists create opportunities for
individual investors and small LPs to invest in the VC asset class.

Why do startups love them? They offer the best ratio of value add per dollar invested of anyone on their cap table and provide access to an expert who can help them solve critical problems.

Each of these four types of VC are in a stable position in the startup ecosystem because of their unique abilities to see, analyze and win deals.

Once on the cap table, they then offer further unique support to kink the curve on outcomes.

But there are many VC firms caught in strategically unstable positions.

@fintechjunkie asks you to consider these two questions:

1. If a potential LP had the ability to choose a VC firm, would they allocate assets to your firm?

2. If a talented founder with an amazing business idea had the ability to choose a VC firm to fund their company, would they pick your firm first?

If the answer to either of these questions is “no,”
then your VC firm is in an unstable orbit.

An unstable orbit means a death spiral could be imminent.

What does a death spiral look like? You're probably familiar with it with businesses...

Miss goals >
Struggle to raise capital >
Refactor goals and hiring plan to preserve runway >
Miss goals >
Lose talent >
Struggle to raise capital >
RIF to preserve runway >
Miss goals >
Lose talent >
Struggle to raise capital >

COMPANY FAILS

It's similar for VCs

Struggle to see & win the best deals >
Accepted term sheets are adversely selected or overpriced >
Track record suffers >
Struggle to raise capital >
Talent loss >
Can’t support companies >
Brand suffers >
Struggle to see & win the best deals >

VC FAILS

VC as an asset class is professionalizing.

We saw it in accounting, investment banking and consulting. Change is coming to the startup ecosystem, too.

See @fintechjunkie's full presentation to learn about the four factors driving this change:

qedinvestors.com/blog/the-three…

Change is always a choice.

As William Edwards Deming said: “It is not necessary to
change. Survival isn’t mandatory.”

Do you agree? Disagree?

We'd love to hear your thoughts and get your feedback.

If you're in NYC next week for @Fintechnexus (formerly LendIt), be sure to stop by @fintechjunkie's presentation in Room 5 at 2:50pm ET on May 26.