In this week’s episode of the StrictlyVC Download podcast, veteran VC Aileen Lee was direct about a major consequence of the recent boom-and-bust cycle: many companies stuck in limbo aren’t just struggling to regain their footing after raising too much money at unsustainable valuations; they’ve also lost the champions who once backed them.
Lee was discussing how limited partners hesitate to criticize powerful fund managers, fearing they’ll be shut out from investing in those firms again. But she imagined one thing they’d say if they could speak freely:
“Everybody wants to get into X brand name fund, and so they never will criticize them [for fear of repercussions] . . .they probably talk about us behind our backs [laughs].. . .But what they would say is [that] all the people who have [were] hired at these venture firms during the ZIRP era . . . they made a bunch of crappy investments” and now they are being elbowed out — except that it’s too late, observed Lee. “All [the LPs’] money basically just got thrown down the drain because the people in the venture jobs didn’t stick around long enough to see if the companies were successful.”
It’s not the fault of these newer investors, Lee continued. “Just a ton of people didn’t get trained and didn’t get any mentorship or apprenticeship were given checkbooks, and a lot of investments were made, and . . .there are a lot of orphaned companies,” as a result.
But there’s another reason startups are being left to their own devices “and I find this crazy,” said Lee; in many cases, companies have been orphaned by a more senior general partner “who led the investment – who is still there [at the firm] but just stopped showing up to the board meetings.”
It’s been happening for years at this point. No one did as much due diligence during the go-go Covid era of funding, and the corner cutting never quite stopped when it came to these same investments. But it’s also a key reason many companies are struggling to find outside help with exit strategies, and why LPs would be justified in voicing more frustration.
As another longtime VC, Jason Lemkin, told this editor in late 2022 when VCs first stopped showing up at the board meetings of startups that were losing momentum: “[S]houldn’t there be checks and balances? Millions and millions are invested by pension funds and universities and widows and orphans, and when you don’t do any diligence on the way in, and you don’t do continual diligence at a board meeting, you’re kind of abrogating some of your fiduciary responsibilities to your LPs, right?”
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