Limited Partners have not asked the questions they should have, the reason why they have gotten fooled.
An amusing television ad by Ally Bank in my view best describes how Limited Partners (LPs) as the investors committed to Venture have been fooled.
The suit then asks one girl if she would want a pony. When she replies yes, he hands her a toy pony. He then moves on to the second girl and asks her if she wants a pony, and then calls in a real pony. The first girl is upset that she did not get a real pony and complains, upon which the man replies, “well, you didn’t ask.”
What pony did you ask for, by your actions?
That is precisely what has happened to LPs in Venture who did not ask the specific questions that could have led to their success in Venture. In many cases, those LPs failed to generate impressive returns in Venture because they did not know they had to ask specific questions and should have taken control of the situation to get the results that the sector can generate.
Many LPs, glowing at the early return profiles of Bill Draper, Vinod Khosla and other early luminaries, just said “yes” to General Partners (GPs) who asked LPs if they wanted Venture returns, without even asking how much (see the many PPM’s that do not include clear return targets).
And of course now, many LPs are utterly disappointed and mistrust the GPs (and worse the sector), similar to how the little girl in the video now mistrusts the man.
Ask the right questions
To help make clear to LPs what questions to ask I have added a new section to the wildly popular presentation The State of Venture Capital, the Prelude (posted originally on Slideshare) describing how an LP thought his commitment would be applied, and how it was in reality.
We pride ourselves on a practical understanding of the Venture ecosystem, top-to-bottom, which is crucial in leading to a permanent fix in Venture and to improve its performance.
The bottom line is simple. It is okay to deploy your money as an LP through GPs as the judge, but just like many Hollywood stars have found out, if you are not signing your checks, know what they are being spent on and how – don’t be surprised your money will be taken for a ride. It is the nature of letting go of financial control (and really, you should not be surprised).
Today’s Venture pipes are still being pumped full of subprime deals, which means the ten-year outlook for Venture will not look much different from its troubled ten-year past. So, the time to act is now if you expect a different outcome in ten years.
The Venture business needs to be reigned in, with restrictions put in place so it can no longer be taken for a ride.
The sector has a bright future ahead, with massive market-pull from the majority of people in this world who still crave technology solutions to improve their lives. The only way we, as the most innovative nation in the world, can screw it up is to deploy a piece-meal financial system that misses its intended target.
That has to stop, right now.
Dear LP, a permanent fix to Venture is waiting for you, by way of a new economic system you can deploy. Act now or forever hold your peace.