Apr 24, 2024 - Business

Dear venture capitalists: You're blowing it

Illustration of a close up of a hundred dollar bill with Benjamin Franklin as a skeleton.

Illustration: Aïda Amer/Axios

Editor's note: This piece first appeared in Dan's Pro Rata newsletter, which dives into the world of dealmaking. Subscribe here.

Dear venture capitalists,

I've been covering your industry for over two decades, through booms and busts and back again. If there is to be another two decades, you'd better change your behavior. And quick.

The basic VC model is cyclical. Raise money, invest that money, exit via IPOs or strategic sales, and then use those exits to raise more money.

  • Get chubby on fees, fatter on carry, and then gleefully obese the more times you rinse and repeat.

But it doesn't work if you stop exiting companies.

  • Limited partners are in this for the coin too, and for years have been stuck in a liquidity drought of your making.
  • VCs let startups stay private longer, often well past the hypergrowth phase that justified sky-high valuations. Now they're praying some still will mature into those inflated prices.
  • It's swinging for the fences on every pitch, rather than taking the single or double that's available.

A whopping 37% of "unicorns" are being held for at least nine years by VC funds, including 13% that are past the 12-year mark, per PitchBook and the NVCA. Remember when you told LPs that your fund had a 10-year distribution period?

  • And please don't blame public markets for the holes you've dug. The Nasdaq, Dow and S&P 500 all recently hit record highs.
  • Venture funds in this environment should be harvesting, not hoarding.

Want to irritate an LP? Ask them about all the VC fund extensions and continuation vehicles they're getting asked to approve.

  • For most institutional investors, venture capital is more a nice to have than a must have. They will move on, and you'll become emaciated.
  • Maybe the Ivy League endowments stay, but they currently have donation issues that are acting like a de facto denominator effect.

In short, you're blowing it.

  • Reverse course now. Both of our jobs depend on it.

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