Oct 18, 2023 · 1h 0m · news
Beezer Clarkson: Are LPs Open for Business & Why Do LP Incentive Mechanisms Need to Change? | E1073 · 20VC with Harry Stebbings
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In this episode of 20VC, host Harry Stebbings sits down with Beezer Clarkson of Sapphire Partners to discuss the shifting dynamics of the venture capital landscape, examining the mathematics of fund returns, the challenges of the current liquidity crunch, and the evolving structural and economic alignments between General and Limited Partners.
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 28.1% of the talking time here. How this is scored →
Harry as informed peer 5.7 Guest teaching 4.7 Guest disagreement 1.9 Harry pushing back 3.8
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 6:36 Direct rejection of LP shutdown narrative
Beezer directly refutes Harry's premise that LP commitments have completely dried up, stating 'That's not true' and explaining that LPs are active but more selective.
Hardest push from Harry ▶ 22:42 Rejection of VC fund-of-funds deal sourcingHarry forcefully rejects the strategy of VCs investing in LP funds for deal sourcing, asserting that any VC relying on this strategy should 'hang up your boots'.
Biggest teaching moment ▶ 54:00 Dissecting venture fund mortality statisticsBeezer educates Harry with historical data revealing that 50% of venture funds fail to transition from Fund 1 to Fund 2, and only 17% make it to Fund 4.
Harry holds his own ▶ 44:09 Analyzing LP agency problems and power dynamicsHarry demonstrates deep domain insight by breaking down why LPs re-commit to fast-deploying funds, detailing coercion, fear of blacklisting, FOMO, and institutional safety.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Advice to a First-Day LP & The Power Law | 4 | 4 | 1 | 2 | Harry asks informed questions about power law dynamics and portfolio concentration. Beezer clarifies how power law outperformance math works for early-stage funds versus growth funds. | |
| Investment Buckets & The Venture Model Viability | 5 | 4 | 2 | 4 | Harry challenges current venture fund model viability by citing Sam Lessin's thesis on direct consumer brand exits. Beezer nuances the perspective by highlighting early GP secondary sales into later rounds. | |
| LP Activity & Liquidity Pressures | 5 | 5 | 3 | 4 | Beezer directly rejects Harry's premise that LPs have completely stopped committing capital, noting activity is ongoing but at reduced deployment rates. Harry pushes back on manager market entry statistics. | |
| Endowment Allocation & The Danger of Pausing | 5 | 4 | 1 | 4 | Harry points out the severe penalty LPs face if they skip allocations and lose access to elite managers. Beezer concurs and outlines liquidity constraints for institutional endowments. | |
| Secondaries & The GP/LP Misalignment on DPI | 7 | 5 | 4 | 7 | Harry presses hard on the structural misalignment between GPs seeking early DPI and LPs seeking long-term fund return maximization. Beezer defends taking 10-20% off the table in massive rounds. | |
| What LPs Want: Momentum vs. Fundamentals | 5 | 4 | 1 | 3 | Harry points out how rapid 12-month deployment cycles disrupt traditional 3-year proof dynamics for Fund 3 raises. Beezer details institutional backing for spinout funds versus smaller angel-led vehicles. | |
| The Trend of Reducing Fund Sizes | 6 | 4 | 3 | 5 | Harry outlines middle-market LP capital consolidation between $300M-$700M fund sizes and challenges Beezer's view on fund size reductions given elevated seed pricing. | |
| Large Funds and the Preservation of Capital | 7 | 5 | 4 | 7 | Harry strongly criticizes VCs investing in funds purely for deal sourcing, asserting they should hang up their boots. Beezer defends the practice, citing operational realities. | |
| LP Co-Investor Signal & Selective Focus | 6 | 5 | 3 | 5 | Harry pushes back on Beezer's nuanced take on LP signaling, arguing that names like Yale and Aksia drive automatic herd behavior in the market. | |
| Emerging to Blue Chip: The Flywheel of Success | 6 | 3 | 1 | 1 | Harry details the mindset of elite VCs (Brian Singerman, Pat Grady) who focus strictly on upside maximization without downside fear. Beezer commends his framing of power law dynamics. | |
| Ownership Math & The Reality of Exits | 6 | 5 | 2 | 4 | Harry runs detailed dilution math showing small check sizes without ownership fail to move fund return dials. Beezer details Sapphire's formal underwriting models. | |
| The DPI Gap and Portfolio Valuation Under Ambiguity | 6 | 5 | 2 | 4 | Harry shares real-world data submitted to 20VC showing massive valuation disparities across GP books. Beezer outlines LP haircut practices and auditor pressures. | |
| The Friction of Misaligned Incentive Structures | 6 | 5 | 3 | 6 | Harry aggressively attacks TVPI-based compensation for LPs as abhorrent and incentive-skewing. Beezer explains the historical context of TVPI as a reliable proxy. | |
| Fee Stacking, GP Compensation, and LP Tolerance | 6 | 4 | 2 | 5 | Harry asks if LPs exact retribution on GPs who stack multi-billion dollar funds to extract $10M+ personal annual base salaries. Beezer contrasts large multi-stage budgets with lean seed teams. | |
| The Battle of Seed Fund Sizes and Strategy | 6 | 5 | 3 | 5 | Harry asserts that leading seed rounds today requires at least a $100M fund size. Beezer counters by analyzing ownership targets relative to total fund size. | |
| Power Coercion, FOMO, and the LP Agency Problem | 8 | 5 | 1 | 5 | Harry articulates a thorough breakdown of why LPs re-commit to fast-deploying managers, citing power coercion, fear of blacklisting, FOMO, and agency safety. | |
| The Delicate Art of Non-Recommitment | 5 | 5 | 1 | 2 | Harry suggests printing out relative portfolio rankings to give transparent non-recommitment feedback to GPs. Beezer describes showing TVPI productivity charts to managers. | |
| The Elite and the Hottest Managers in Venture | 5 | 4 | 1 | 1 | Harry names top-performing venture managers (Founders Fund, Index) and moves into the quick-fire segment. Beezer commends Harry's innovative venture/media business model. | |
| Quick Fire: Lessons from a Major Manager Miss | 5 | 6 | 1 | 2 | Beezer admits her biggest pass was Initialized Fund 1, which went on to return $390M. Harry quotes Nikhil Basu Trivedi on making exceptions for exceptional people. | |
| Venture Capital Fund Graduation and Survival Rates | 5 | 7 | 1 | 2 | Beezer reveals striking historical data showing a 50% failure rate between Fund 1 and Fund 2, and only a 17% survival rate to Fund 4. | |
| The Unstapling Trend and Managing the Next Generation | 5 | 4 | 1 | 1 | Beezer discusses fund unstapling trends, generational firm succession, and Sapphire taking over CalSTRS's early-stage venture mandate. |
Statements from this episode (52)
Clarkson: LPs are not in the same risk-taking business as GPs
“Sometimes other folks forget that LPs are not in the same business of risk taking the way that GPs are.”
Sapphire Partners: 3x venture funds require at least one 1x fund returner
“We've yet to see a fund that's returned three or more X that does not have a company that's returned at least one time the fund.”
Beezer Clarkson: LPs are continuing to make new venture commitments
“That's not true. I think LPs are being more selective and making new investments. I know we are, I know others that are, They're absolutely making new investments.”
Clarkson: VC fundraising cycles are extending back to three years
“We saw numbers about, like, 12 to 18 months, which is historically atypical, right? Usually it's three years. So if now they're lengthening back out to three years, yes, there's fewer funds being raised.”
Clarkson: LPs face liquidity strains from pulling forward future budgets
“A lot of LPs also pre-spent future budgets, if that makes any sense. If you were raising a fund every 18 months, and I thought you were raising every three years, I had two choices. Either I pull from future year budgets, or I reduce my check so that I stay co…”
Clarkson: LPs must commit consistently because venture markets cannot be timed
“There is a very long history of looking at venture returns, which says if you're not in the market, you just don't know how to call the exit, so you have to be consistent about committing.”
Stebbings: Top VC managers will reject LPs who skip fund cycles
“If you skip a year and you skip a year on the best managers, they're not going to take you back.”
Stebbings: Jason Calacanis bet $100K that IPO market returns H2 2024
“And he's got a hundred K bet with me on it being the back half for next year. One a week for the back half for next year.”
Stebbings: Tech IPO market will not re-open until H2 2025
“But I think it's going to be longer. Like, you know, it, you'll see it in the update coming out this weekend, but it's like, you know, data breaks, stripe, it's not going to be enough to actually crack open the IPO markets like we think it will be, I don't thi…”
Stebbings: VC fund secondary positions are trading at 80% discounts
“I'm seeing fun positions now being 80% discount.”
Clarkson: Extended market downturn will force institutional LPs to sell holdings
“I think we're seeing some, the tip of the iceberg. And if the market doesn't come back, there could be a lot more. And that is when, to your point about When endowments and foundations and other LPs have to make some really hard choices about what they keep in…”
Clarkson: LPs are shifting to accept partial secondary sales of winners
“And I've heard LPs that used to say, hold on to all your winners all the time are now saying, well, I meant that. But in context, there are times when it could be useful.”
Clarkson: LP and GP bull market investments were driven by momentum and FOMO
“I just think back when it was sort of this big run up in the, when we were in the bull market, it looked like there were a lot more nodes in areas that could be very productive, and people went for it because they didn't, there's a lot of FOMO, LPs and GPs ali…”
Clarkson: Institutional LPs re-up for Fund II because data requires Fund III
“So I think those institutional fund ones from day one will have a much easier time raising fund two, because most LPs have been in the venture business for a while, know that there is only so much you can show in two to three years of work. So barring somethin…”
Stebbings: Seed startup pricing is currently at or near all-time highs
“I mean, seed pricing is higher or as high as it's ever been.”
Clarkson: Multi-billion-dollar funds exist because large LPs prioritize capital preservation
“There is a class of LPs that need to write very large checks. Those are vehicles that work for that fund size. We also have to understand, I mean, I know you get this, but it's, I think sometimes other folks forget that LPs are not in the same business of risk…”
Stebbings: VCs investing in funds for deal sourcing are admitting defeat
“If you are investing in a fund for a deal sourcing strategy as a VC, you should hang up your boots. Like, that is a, that's like admitting defeat. I will go on record and say that.”
Stebbings: Sequoia's scout program missed Series A and B rounds
“Actually there was a big problem, which is like their data monitoring wasn't what it could have been. And so they missed a lot of A's and B's and then did the C's of companies that they did scout deals in. And so ultimately, yes, they got great returns on the …”
Clarkson: Some LPs invest in funds primarily for direct co-investment checks
“Somebody who, when you call them and you say, why'd you invest in this fund, and they say, oh, I'm only here for the direct deals, I don't care about the return as much. It's not that it doesn't matter, it's just, they're not doing it for the fund return, they…”
Clarkson: Emerging VC managers rarely achieve persistent flywheel in fund one
“It's just very hard to do in your first fund cycle because there's just not enough time.”
Stebbings: Top VCs prioritize upside maximization over downside risk
“When I think about Brian Singerman and Pat Grady, They're not worried at all about it going to zero, but they are very worried about upside maximization, and I think you get that uncapped upside lack of fear of downside through immense success.”
Clarkson: Venture funds over $50M face trade-off between ownership and size
“I think we've yet to run the math and see a fund that's gone over fifty million that doesn't have to start having some trade-off between ownership and AUM.”
Clarkson: Sapphire underwrites Series A funds to 3x and Seed to 5x
“But on the math of it, we just underwrite a series A fund to a three X and C to a five X, and you just look at what the numbers line up at, and you say, okay, so given the ownership and given the AUM, what needs to be true to return the fund one time, half a t…”
Beezer Clarkson: VC loss ratios were unusually low from 2020 to 2022
“One of the weird things about the market from the last, sorry, twenty-twenty to twenty-twenty-two, we did not, as an industry, have the loss ratios, even probably back earlier, that one would expect in venture.”
Clarkson: Absolute TVPI-to-DPI gap is likely largest since dot-com crash
“The only other time that would be equivalent would be about 99 and 2000, and I don't know if there is the volume of funds in the market then, so, and absolute numbers, he's probably right.”
Clarkson: LPs internally discount GP fund valuations by 20% to 25%
“Well, I know a lot of LPs that will ask their managers, and then go back home and take another 20 to 25% off the top, because there's things that nobody knows.”
Clarkson: LPs See Venture Managers Value Identical Portfolio Companies Differently
“If you're an LP that has a, as a sort of existing book of venture business, and you've got it over different times, you will a hundred percent see that people will value their companies differently.”
Clarkson: Auditors urged venture GPs to coordinate valuations in late 2022
“Well, and then I heard stories, and this is a story, so put it under the rumor and hearsay bucket, but that last year, the end of twenty-twenty-two, when the auditors were getting involved, they were telling GPs to talk to each other to try to figure out how t…”
Clarkson: Seed Managers Lose Direct Boardroom Access by Series B or C
“That disputes my theory, because a lot of times seed managers don't, they only might have information rights by the time a series B or C comes up, so they might not have all the information that someone in the boardroom has.”
Clarkson: Multi-billion-dollar VC funds disconnect GP fees from actual returns
“If you have a fund that's, I don't know, many billions, you're going to have a number of GPs that are making significant dollars, assuming it's spent Not spent on platform and other things. But if you can make that kind of money without even returning the fund…”
Stebbings: Multiple VC general partners earn over $10M in annual base salary
“I have many friends who are doing like 10 plus a year base.”
Stebbings: Larger GP commits do not indicate greater manager dedication
“Billionaire founders of funds, they can put in a lot more money than me. Doesn't mean they're more committed than I am.”
Clarkson: Some Sapphire-backed emerging funds struggled to cover basic rent
“We've had some funds in our program where I'm a little worried they can't pay their rent.”
Clarkson: Strict GP commit requirements create unnecessary barriers for new managers
“To your point about GP commit, yes, it has been an unnecessary barrier to entry for too many GPs.”
Stebbings: Seed funds leading rounds today need at least $100 million
“But I think if you're leading seed rounds today, you can't have less than a hundred million dollars.”
Beezer Clarkson: LPs are asking VC managers to slow deployment
“I think there's been many conversations with LPs suggesting GPs slow their roll.”
Clarkson: LP Chief Investment Officer Average Tenure Is 3 to 5 Years
“Do you know the average CIO is like a Five year tenure. I did, I actually thought there were like, 15 years. But no, a friend of mine was like, oh no, it's three to five years.”
Clarkson: VC managers cannot generate 3x fund returns through company soft landings
“I'm having more conversations with more managers who are like, hey, we're just going to try to find some soft landing for these companies. It's just not going to work, which we've been expecting for years to my point about loss ratio. So that doesn't wildly su…”
Clarkson: The list of elite VC managers with unconditional LP backing is shrinking
“There are always going to be some managers that have that kind of LP pull that people will just keep working with. But I think that list is getting smaller, and I think the names are switching around.”
Clarkson: Venture capital LPAs are overly complicated and useless
“It's so hard to read. It's so complicated. It's so not useful. It's supposed to be a tool to understand how our relationship works, and it's just a big legal pile of documents.”
Stebbings: Single VC fund lifecycles last 15 to 20 years, not 10
“Everyone says 10 years. It's not 10 years. It's like 15, 20.”
Clarkson: I passed on Initialized Capital's first fund, which returned $390M
“So I passed on the initialized fund one because we had just launched, yes, I know. It was bad. But- Do you know, it made three hundred and ninety million.”
Clarkson: Growth equity mindset in early-stage funds fails long-term
“It's so clear in early stage, if you're not taking a big swing for the fence, which doesn't mean saying taking like ridiculous, I haven't thought about it risks, right? But you just have a lot of people that think that they can do sort of smaller investments, …”
Clarkson: Far fewer venture funds achieve 10x returns than expected
“There's so many fewer of those than people thought.”
Beezer Clarkson: Delivering three or four consecutive strong DPI funds is world class
“I think the numbers will tell you if you ask different LPs, if you can get three or four funds in a row with strong DPI, that is world class.”
Clarkson: Venture capital breakage between Fund I and Fund II averages 50%
“We've been looking at data going back to 1995. I was shocked at the breakage. The breakage between Fund One and Fund Two is not every year, but averages out to be about 50%.”
Clarkson: Only 17% of venture funds successfully reach Fund IV
“What was also sort of heartbreaking was the fund one to fund four on average, again, these are averages, some years are better, some years are worse, is 17%.”
Clarkson: VC firms are unstapling core and opportunity funds
“The other thing we're seeing in this market is people are unstapling their funds because a number of LPs felt dragged into it”
Clarkson: Venture Market Is at Bottom and Will Recover by 2024-2025
“I think we're bumping along the bottom. I think it should start coming up at some point. You know, I don't know if Jason's right, it's back half of 24, you're right, and it's 20, 25. At some point, it will come back up.”
Sapphire Partners Takes Over CalSTRS Early-Stage Venture Fund Mandate
“We announced this about two weeks ago that we've taken over the early stage venture fund mandate for CalSTRS and what this means. So for folks that aren't familiar with CalSTRS, they're the world's largest educator pension fund in the world, which is Pretty co…”
Shorts cut from this episode
▶ Why Massive Funds Will Raise From More Risk Averse LPs 😧 · (@0:00)
▶ Why VCs Need a Fund Returner 👆 · 20VC with Harry Stebbings (@2:11)
▶ The Death of Loss Ratios 😧 · 20VC with Harry Stebbings (@32:29)
▶ Why LPs are Slowing Down in Venture 📉 · 20VC with Harry Ste (@7:46)
▶ What do LPs want today? 🤔 · 20VC with Harry Stebbings (@19:14)
▶ The Tradeoff Between Ownership and AUM on funds over $50M 💰 (@30:26)