Can Limited Partners See The Pipeline Of VC Funds And Rejected Projects?

No, not generally. But limited partners can request to get reported on it as a condition of the allocation, depending on the VC firm in question.

Emerging manager VC funds do not have a reputation for setting the terms, and those firms can be more easily swayed to provide such information. Established firms with stacked and parallel funds have standard reporting pre-established for all their funds. Questionable performance in those funds can lead to tightening up the screws by LPs. If prior funds are doing well, there is no need for more reporting. Since multiple LPs support most funds, the other LPs will agree on the same kind of reporting requirements.

But even if that information is provided, most LPs in venture have an allocation of less than a single-digit percentage of total assets under management devoted to venture and have no time or money to understand the intricacies and the unique risk deployed to venture. Hence, more insight provided to them may lead them to the wrong conclusions.

Let me give you a plethora of funding faux pas :

1/ No venture firm in Silicon Valley (offered the deal) tagged Tesla, arguably the most critical game-changer in technology history, as viable and declined to support the company in its formative stages, only later to hasten to become part of it the success that claims many fathers. Many false negatives like Tesla have gone unnoticed as a result of venture capital’s subprime investment thesis.

2/ Venture firms regularly and conjointly blow up the valuations of companies using temporal buzzwords void of renewable socioeconomic value the world cares about, like mobile (remember?), capital efficiency (remember?), outsourcing (remember?), Gaming (remember?), iPhone applications (remember?), Facebook applications (remember?), crowdsourcing (remember?), the sharing economy, artificial intelligence, cryptocurrency, etc.

The game here is to keep making up new terms, so nobody has the time to reflect, wonder, question, and the reason why a massive greenfield of technology innovation yields so few venture firms who can produce returns from it.

The artificial inflation not unlike the recently discovered significant wine scam in which a Koch brother and many others in the wine industry lost a lot of money, proving how easy it is to artificially blow up the value of an asset class by having just one buyer drive up the price with manmade voodoo. Unicorns do not yield a repeatable asset-class strategy.

3/ Excessive collusion, deal staging, and deal fragmentation have turned venture into a sector with no less than ten levels of embedded risk diversification. A game of risk avoidance applied to a sector in need of the alignment of foresight with an entrepreneur predicated on the pursuit of specific risk. Hence, more in-depth reporting of the false positives and false negatives by a VC will tell you a mere consequential rather than a causal story of venture success.

My point is that more information about the current malfeasance of risk in asset management will not allow you to drive better returns in venture. The key to driving better venture performance is understanding its unique risk profile, a risk profile diametrically opposite to the asset-class of private equity most LPs have tucked venture under.

Today, LPs deploy a model in which distribution determines risk, while the right and prudent allocation model requires risk to assess distribution.

Subscribe > to receive articles like this in your email inbox, collated weekly.

Donate > to cover our operating expenses to push for fundamental change.

Click to access the login or register cheese