In a recent episode of the StrictlyVC Download podcast, venture capitalist Aileen Lee highlighted the significant ramifications of the current boom-and-bust cycle for startups. Many companies find themselves in precarious situations, struggling to recover after excessive funding at unsustainable valuations, while also losing the advocates who once supported them.
Concerns Over Limited Partner Dynamics
Lee observed that limited partners (LPs) often refrain from critiquing influential fund managers due to fear of jeopardizing future investment opportunities with those firms. She theorized that if LPs spoke openly, they might express frustration over the influx of inexperienced individuals hired during the zero-interest-rate period, who ultimately made subpar investments. These ill-fated investments have left many LPs feeling as though their funds have been wasted since the inexperienced venture staff did not remain long enough to witness the outcomes of their investments.
The Impact of Inexperienced Venture Capitalists
The venture capital landscape has changed dramatically, with many new investors lacking adequate training or mentorship. Lee pointed out that these individuals were handed checkbooks prematurely, which led to numerous poor investment decisions and a rise in “orphaned companies.” This situation has left many startups without necessary support or guidance.
General Partners Abandoning Their Investments
A troubling trend has emerged where senior general partners, although still associated with their firms, have discontinued their involvement in board meetings for certain investments. Lee expressed disbelief at this phenomenon, which has contributed to the difficulties these companies encounter in securing external assistance for exit strategies. The lack of due diligence—exacerbated during the COVID-19 funding boom—has continued to plague investments made during that period.
Criticism of Oversight in Investment Practices
Fellow venture capitalist Jason Lemkin echoed Lee’s concerns about the negligence of fiduciary duties by firms. He emphasized the importance of consistent diligence, especially considering the millions invested by pension funds, universities, and families. When VCs neglect their responsibilities, they undermine trust and accountability in the investment process.
For insights and updates, tune in to StrictlyVC Download, which releases new episodes every Tuesday.