This month’s write-up is about the changing LP (limited partner) landscape. I have posted my thoughts about this many times over the years, and I continue to believe we are going to see a big shift going forward. LP dollars have already started leaving the venture capital industry, and I don’t see that stopping. Returns have been slower than anticipated with both acquisitions and IPOs lagging in the last few years. The huge influx of capital during the height of the VC boom in 2020 and 2021 at a time when valuations were very high and capital efficiency was not the norm did the industry no favors.

I first tweeted this in October 2023: “My prediction: institutional LP $ going to VCs will decline by half in the next 5 years. They will reallocate to safer asset classes. The largest VC funds will get 99% of what’s left, and these large funds will do ‘fund of funds’ investing in early managers for deal flow.” I retweeted it a few weeks ago because it’s (mostly) still relevant. While I’ve heard of one more large VC fund doing fund of fund investments into early managers recently, it’s only with $250K checks (which is paltry). So maybe the mega funds acting as fund of funds part of my prediction won’t come to fruition as originally anticipated.

I included some other investors’ thoughts on the topic below in the content picks on investing section. They agree that the majority of LP funding is going to a select few firms and that many funds are not going to have the access to capital they’ll need going forward. Sounds bleak!

So where is the opportunity? First, I’m hearing that corporate (strategic) LPs are still deploying into specialty funds. If a fund has a very clear value proposition in healthcare for example, health systems might invest. Food companies, insurance companies, and more are still writing checks into relevant funds. New GPs may want to refine their focus with the strategic investor in mind as long as that capital pool stays liquid.

It’s still hard as ever to get in front of family offices, and I don’t really sense much has changed in that part of the funding world. If you get in front of one who likes you and has capital to deploy, you’re golden. But that has always been tough, especially when a lot of family offices want to meet with GPs just for their deal flow. (I have resigned myself to sending family offices deal flow and never expecting checks from them in the future. I am trusting that karma will bring the goodness back to me in other ways!)

Finally, I believe individual LPs have the potential to fill a gap as the long-time institutional players silently leave the industry or concentrate even more capital in the largest VC funds. GPs will have to figure out how to best leverage these individuals - is it in a small fund with a commitment level that works for individuals? Manage SPVs (LLCs incorporated for a specific opportunity)? Some kind of new model that will emerge? I’m excited to see what innovations we see over the next few years as the LP landscape shifts dramatically!