Feb 19, 2024 · 1h 21m · news
Roger Ehrenberg: Why VC Returns Will Get Worse & Why LP Incentive Structures are so Broken | E1117 · 20VC with Harry Stebbings
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In this interview on the 20VC podcast, veteran investor Roger Ehrenberg discusses the structural bifurcation of the venture capital industry, the systemic flaws in LP incentive structures, and the critical mechanics of managing portfolio liquidity through secondary sales and continuation funds in a challenging macroeconomic climate.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 19.5% of the talking time here. How this is scored →
Harry as informed peer 3.5 Guest teaching 3.0 Guest disagreement 1.3 Harry pushing back 1.8
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 29:37 Rejection of conflict of interest premise
Roger explicitly cuts off Harry to correct his assumption about continuation fund pricing, forcefully stating 'You're not the price setter and the price giver' to reframe the mechanism.
Hardest push from Harry ▶ 23:20 Challenge on Yale Swenson model copycatsHarry directly challenges Roger's endowment argument, pointing out that modern LPs blindly copying David Swenson lack his 1990s non-consensus advantage in a drastically worse performing asset class.
Biggest teaching moment ▶ 4:54 Reframing Doug Leone's VC commoditization thesisRoger flatly disagrees with Doug Leone's quote brought by Harry, educating the host on denominator effects, return compression, and the structural barbelling between mega-platforms and boutique seed firms.
Harry holds his own ▶ 6:56 Posing specific market terms to challenge boutique viabilityHarry demonstrates deep market expertise by citing specific valuation terms (10 on 50, 20 on 100 in Europe for pre-product) to press Roger on how boutique VCs can realistically compete against mega-cap firms.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Transitioning From Wall Street to Early-Stage Venture | 2 | 2 | 0 | 0 | Harry sets up the interview by referencing Roger's previous podcast appearance and his observation about 17-year industry cycles. Roger collaboratively details his transition from running derivative desks on Wall Street to launching IA Ventures. | |
| Overheating and Timing the Market Peak in Venture Capital | 4 | 4 | 4 | 2 | Harry quotes Justin Ishbier and Doug Leone to ask whether venture capital has become a commoditized low-margin asset class. Roger explicitly rejects Doug Leone's premise, reframing return compression around the denominator effect and industry barbelling. | |
| How Boutique Players Compete in Hyped and Overheated Markets | 5 | 3 | 2 | 4 | Harry demonstrates strong market knowledge by citing specific European seed rounds (10 on 50, 20 on 100) to challenge how boutique firms can compete. Roger outlines his strategy of avoiding hype themes like pure AI to seek less crowded opportunities. | |
| The Normalization of VC Fees to a Hedge Fund Model | 3 | 3 | 1 | 1 | Harry jokes about applying hedge fund fee structures like Renaissance Technologies to venture funds. Roger educates on hedge fund share class mechanics and predicts VC fee normalization across asset tiers. | |
| Broken LP Incentives and the Lack of DPI Discipline | 5 | 2 | 2 | 3 | Harry shares direct quotes from LPs admitting they prioritize job security and institutional brand names over DPI performance. Roger emphatically agrees, calling traditional LP incentive structures completely broken. | |
| Are New LP Classes 'Fair Weather' Investors? | 4 | 4 | 1 | 2 | Harry asks whether new LP classes like sovereigns and family offices are fair-weather investors compared to traditional endowments. Roger breaks down the differences between corporate LPs and long-term sovereign allocators. | |
| The Liquidity Premium: Is Venture Still an Attractive Asset Class? | 6 | 4 | 2 | 5 | Harry challenges the modern applicability of David Swenson's Yale endowment model, pointing out that LPs copying Swenson lack his 1990s non-consensus timing and face a far worse performing asset class today. Roger acknowledges the distinction and adjusts his return expectation framework. | |
| Continuation Funds: Solving the Venture Liquidity Crisis | 3 | 5 | 3 | 3 | Harry raises a concern about GP conflicts of interest in continuation funds when setting prices. Roger directly interrupts and corrects Harry, explaining that net new investors and third-party valuation firms establish the market price. | |
| The Valuation Lag: Desperation in Private vs. Public Markets | 3 | 3 | 1 | 1 | Harry inquires about the valuation disparity across venture fund portfolios. Roger details the structural lag between public market price discovery and private portfolio markdowns. | |
| The Strategy of When to Exit: IPO Readiness vs. Secondary Sales | 3 | 4 | 1 | 1 | Harry asks for strategic advice on managing exit timing based on institutional data. Roger outlines IA's two-year operational playbook for IPO readiness versus secondary liquidity. | |
| Case Study: IA Ventures' Secondary Sale in Wise | 4 | 3 | 1 | 2 | Harry asks if traditional fund recycling is dead due to the drying up of small $50M-$70M M&A transactions. Roger agrees and shares how secondary sales in Wise allowed IA to recycle capital into early rounds. | |
| Distribute vs. Hold: IA Ventures' Legendary Trade Desk Investment | 4 | 3 | 1 | 2 | Harry asks about managing public stock positions post-IPO, focusing on Trade Desk. Roger walks through the financial logic and early distribution strategy that generated massive early DPI for Fund I. | |
| Do Rich Investors Make Better Liquidity Decisions? | 4 | 4 | 2 | 3 | Harry proposes that wealthy investors make superior liquidity decisions because they lack financial urgency. Roger reframes the dynamic, arguing that institutional validation and franchise security matter more than personal wealth. | |
| Investor Psychology and the 'Schmuck Factor' of Early Liquidity | 3 | 3 | 1 | 1 | Harry asks how investors maintain psychological composure during market down cycles. Roger discusses partnership open-mindedness and taking the 'schmuck factor' off the table via partial secondary sales. | |
| The Success Flywheel vs. Fighting Like a Dog on the Field | 3 | 2 | 0 | 1 | Harry quotes Doug Leone regarding whether successful venture capitalists can rely on deal flow flywheels or must continue hustling. Roger confirms that top investors must maintain intense hustle regardless of past track record. | |
| Roger's Journey with Wealth: From Wall Street Bonuses to Being Post-Economic | 2 | 1 | 0 | 0 | Harry asks Roger about his personal relationship with wealth and defining financial milestones. Roger shares his transition from Wall Street bonus checks to being post-economic while retaining his underlying motivation. | |
| Walking the Talk: Grounded Parenting and the Keys to a 37-Year Marriage | 3 | 3 | 1 | 1 | Harry references conversations with David Velez and Justin Shore to ask about parenting in wealthy environments, then transitions to marital longevity. Roger shares grounded parenting strategies and communication rules from his 37-year marriage. | |
| Roger's Return to Seed Stage Venture | 3 | 2 | 1 | 1 | In a quickfire sequence, Harry asks Roger about sports team ownership, macro timelines, and investment philosophy. Roger outlines his framework for managing short-term pain for long-term gain. | |
| Crucial Advice for Fundraising Managers | 3 | 2 | 1 | 1 | Harry quotes Vinod Khosla's assertion that 90% of VCs destroy value. Roger advises fundraising managers to avoid conventional playbooks and discusses his ten-year outlook. |
Statements from this episode (41)
Ehrenberg: I Would Spend Almost No Time Investing in Pure AI
“I'm not in pure tech anymore, but if I was, I would literally be spending almost no time in pure AI.”
Ehrenberg: Early-Stage Venture Capital Will Never Be Commoditized
“Venture is never going to be commoditized. Maybe mid and late stage will feel more like institutional asset management, but I think incubation, pre-seed, and seed will always occupy a different place.”
Ehrenberg: Top VC Firms Will Maintain Premium Fees Due to Outperformance
“It's going to be just like hedge funds. You know, look at Sequoia. The best firms charge premium fees and will be able to get it because on an after fee basis, they still outperform.”
Ehrenberg: Wall Street and Hedge Fund Culture Is Corrosive
“Knives were never sharper in terms of, you know, the politics, whether it's inside hedge funds or at the top of wall street, because the pie is big and people in those cultures want as much of the pie as they possibly can. And I just found that culture corrosi…”
Ehrenberg: Andreessen Horowitz and Insight Partners Are Corporations, Not Venture Firms
“Yes, you're going to have more of the Andreessen's and the insights and these platforms that they're not really venture firms. They're Corporations that are multi-stage investment firms. That have some venture, that have some growth, that have some pre-IPO, an…”
Ehrenberg: Sovereign wealth funds have become ubiquitous across venture capital
“I mean, sovereigns were not major players in the last cycle of VC and now sovereigns are everywhere.”
Ehrenberg: Very early stage artisanal venture capital will never be scalable
“That's the thing is very early artisanal VC is not scalable and it never will be. People have tried and they have failed.”
Ehrenberg: Inflow of sovereign and family office capital into VC is permanent
“If there's no going back because there are now these much larger firms that are institutionally investable that can take sovereign money and, you know, massive family office money in that trend, that wave is just going to continue.”
Ehrenberg: Late-Stage Venture Capital Will Face Hedge Fund-Style Fee Compression
“So what I would expect is a normalization that would look a lot like the hedge fund industry where smaller Longer dated, higher returns, differentiated managers will still command premium fees, and then more mature strategies, late-stage growth, pre-IPO, massi…”
Ehrenberg: Traditional LP structures are completely broken
“So LP structures, traditional LP structures are completely broken.”
Ehrenberg: Mid- and late-stage venture will face greatest disruption
“The greatest disruption in a way is going to be in the mid and late stage venture scene where managers are going to want to and need to gather enormous amounts of assets.”
Ehrenberg: Corporate venture LPs are cyclical and fair-weather investors
“So I think that corporates, I don't even need to make the argument. They are fair weather and they are cyclical. So as a generalization, there are obviously a few that are in it for the long haul, but it is very much a fruit of the day.”
Ehrenberg: Venture Capital Returns Below 10% Fail to Compensate for Illiquidity
“If you could get risk adjusted returns of. 12 to 15%, that's pretty freaking good. If it's below 10%, then you're not getting paid for the risk. Right, so there's, it's what is the premium that you're willing to accept Above liquid strategies over long periods…”
Stebbings: Andreessen Horowitz Will Keep Raising Billions on 12% Return Expectations
“I think to your point, though, that the 10, 12% being good enough, I think that's exactly why Andreessen respectfully will continue to thrive and raise billions and billions of more dollars, because compared to the six or seven percent net that they're getting…”
Ehrenberg: Venture Capital Requires a 500-700 Basis Point Illiquidity Premium
“If you're getting paid 500 to 700 basis points for illiquidity, and you're a, either a perpetual institution by charter or just so massive that you effectively act like that, then Yes, that occupies a perfectly fine place in your portfolio.”
Harry Stebbings: IPO Markets Will Not Reopen in 2024
“I don't think IPO markets will open for the twenty-twenty-four, bluntly.”
Stebbings: Stripe and Databricks Will Not Go Public in 2024
“I don't think Stripe or Databricks will go out in 24.”
Roger Ehrenberg: Continuation Funds Will Be the Primary VC Liquidity Source
“I think probably the greatest source of liquidity now is going to be continuation files, and it's going to be existing portfolios, raising money from net new investors, yet it reflects today's valuations, and you basically get fresh capital to join the partner…”
Ehrenberg: Insight Partners and NEA Have Formed Continuation Funds
“Honestly, that's what Insight's done. That's what NEA's done.”
Ehrenberg: Continuation Funds Exploit Venture Capitalists' Desperation for LP Liquidity
“Because there has been so little liquidity for so long, some managers are desperate because they're under tremendous heat from their LPs. To get blood from a stone, right? And then you've got continuation fund managers that are deeply aware of the phenomenon I…”
Ehrenberg: Underperforming VC Firms Face a Slow-Motion Train Wreck
“I think there is a whole swath of the industry that is going, it's like a slow motion train wreck. They are not going to be able to raise new funds.”
Ehrenberg: Clubhouse Was Light Years Away From Public Market IPO Readiness
“And let's just pick on Clubhouse since you raised it. If you had taken a deep breath, looked at an offer, said, huh, from an IPO readiness perspective, where is this company? The objective answer to that question is no fucking where light years away.”
Ehrenberg: Union Square Ventures excels at selling secondary stakes pre-IPO
“And you know, who's done that? Really well is USB. Fred, very selectively. And they've obviously had big IPO winners, and they've had some IPO winners where they've sold some in advance.”
Ehrenberg: Wise Generated Profits and Held Annual Employee Tenders Pre-IPO
“Wise did this brilliantly actually, you know, they made money, right? Like they generated actual money way in advance of going public. So they held these kind of annual employee tenders where we basically cleaned up the cap table.”
Ehrenberg: IA Ventures Returned Half of Fund II via Wise Pre-IPO Secondary
“We sold into one of those for the reasons I said, we ended up being able to return half of fund two and generate recycling capital. I mean, which, because remember fund two is a hundred and five billion, which obviously has done extremely well.”
Ehrenberg: IA Ventures Funded Trade Desk Series B Using Simple Exit Liquidity
“We had a similar result From a very different situation in fund one, when we sold simple to BBVA, because that generated the liquidity that we then invested in the trade desk series B.”
Ehrenberg: Secondaries Are Now the Only Way to Recycle Capital
“Really, the only way to get that recycling now is through secondary.”
Ehrenberg: IA Ventures Refuses to Use SPVs to Fund Recycling
“Which is why a lot of firms try and solve the problem with SPBs. We never would do that. So we forced ourselves into finding solutions for recycling.”
Ehrenberg: IA Ventures Held 17% Ownership in The Trade Desk at IPO
“There is nothing like taking a company public where we owned 17% on the day of IPO.”
Ehrenberg: IA Ventures Turned $5.2M in The Trade Desk into $300M DPI
“I think that we ended up returning five to six X net on that one trade. It was a two hundred and fifty million dollar fund. So 5000005.2 million turned into net two 50 to three hundred million DPI.”
Ehrenberg: IA Ventures Co-Led The Trade Desk's Seed Deal Off a PowerPoint
“We literally committed on the basis of a PowerPoint. And we worked on that deal with Founder Collective. So Eric Paley and I both sat on the board. And so we literally co-led the seed round together and then IA breached them three times before raising their Se…”
Ehrenberg: Sequoia's evergreen structure makes complete sense for established venture firms
“Now, Sequoia made the franchise four years ago. So for them to set up this evergreen structure, absolutely. Makes all the sense in the world.”
Ehrenberg: Holding The Trade Desk Longer Would Have Added 5x-10x Fund Return
“We could have held onto TTD and returned another five to 10 X of the fund.”
Ehrenberg: Selling Trade Desk Early Was Undeniably The Right Decision
“Let me tell you, the downside regret versus the upside opportunity cost. Like, we made the right trade. It's not even a question.”
Ehrenberg: Sports franchises are poorly managed with room for improvement
“They are not managed as well as you would think. There's a lot of room for improvement.”
Ehrenberg: Sports Team Prices Will Keep Rising as Institutional Capital Enters
“No. Because of something we talked about earlier, which is with this tremendous influx of institutional capital and with pro teams, pretty soon the NFL, I would guess, becoming PE investable, return expectations are going to come down and prices are going to g…”
Ehrenberg: IPO Market Will See Green Shoots in 2025, Full Return 2026
“I think we'll see some green shoots in 25, but probably 26 is when it's really going to come back.”
Ehrenberg: A Trump presidency would ease FTC antitrust policy and unlock M&A
“Yes, certainly with a different head of the FTC, it's, I mean, the pendulum has swung all the way in the other direction. I think you could argue that antitrust was extremely weak for a generation, and now it's swung all the way in the other direction, so I wo…”
Roger Ehrenberg: Fund managers raising capital must be shocking and ignore playbooks
“Be different. Take risk. Don't play it safe. Have a deeply held thesis and just put it out there. Be shocking. Don't be a sheep. Don't follow the playbook.”
Ehrenberg: The best founders use VCs for psychological support, not dependence
“I think the best founders aren't dependent. I think the best founders benefit from really good VCs to act as a sounding board, especially in those earliest days and to give them honestly, empathy and psychological support, because that is often the hardest thi…”
Ehrenberg: VCs Are Value-Destructive Unless Humble About Their Limitations
“I don't know about the percentage, Harry, but I do think that there is something to the general view that VCs think a lot of themselves and probably attribute more skill than they act to themselves than they actually have. I think unless a VC is, is proactivel…”