Having Won Over VCs, Y Combinator Turns to LPs(techcrunch.com)
techcrunch.com
Having Won Over VCs, Y Combinator Turns to LPs
http://techcrunch.com/2015/08/24/having-won-over-vcs-y-combinator-turns-to-lps/
10 comments
LP typically stands for "Limited Partnership", a form of organization where one or more general partners have agency and unlimited liability similar to that of a general partnership and one or more limited partners whose liability tends to be significantly less but whose role in the enterprise is generally passive. There's a wikipedia article.
Generally, a limited partnership have been useful when there is a plan not to bring on additional investors later, since later investors are able to renegotiate terms. In other words, LP's are common when all the money ever needed is going to be raised at once and any future expansion of the project will be funded by traditional loans [a construction loan for a shopping center] and from projected revenues [e.g. ongoing maintenance of the shopping center once it is operational].
This also means that projects structured as LP's are not really tailored to take advantage of hockey stick growth. Though an LP may use equity growth as a means to an end, the focus is usually on income, and matching the cashflow objectives of LP like investors is why individual Venture Funds have limited lifetimes.
Generally, a limited partnership have been useful when there is a plan not to bring on additional investors later, since later investors are able to renegotiate terms. In other words, LP's are common when all the money ever needed is going to be raised at once and any future expansion of the project will be funded by traditional loans [a construction loan for a shopping center] and from projected revenues [e.g. ongoing maintenance of the shopping center once it is operational].
This also means that projects structured as LP's are not really tailored to take advantage of hockey stick growth. Though an LP may use equity growth as a means to an end, the focus is usually on income, and matching the cashflow objectives of LP like investors is why individual Venture Funds have limited lifetimes.
A few clarifying points:
1) Private Equity funds (including VC funds) are often structured as Limited Partnerships. The PE/VC firm and/or its principals are General Partner(s) in the Limited Partnership. Investors are Limited Partners.
2) LLP = Limited Liability Partnership
3) LPs usually refers to Limited Partners (referring either to the Limited Partners in a particular fund, or to PE/VC investors in general)
4) Not all the money needs to be invested up-front. Partnerships can be set up such that an amount of capital is committed up front, but drawn down from investors on an as-needed basis.
1) Private Equity funds (including VC funds) are often structured as Limited Partnerships. The PE/VC firm and/or its principals are General Partner(s) in the Limited Partnership. Investors are Limited Partners.
2) LLP = Limited Liability Partnership
3) LPs usually refers to Limited Partners (referring either to the Limited Partners in a particular fund, or to PE/VC investors in general)
4) Not all the money needs to be invested up-front. Partnerships can be set up such that an amount of capital is committed up front, but drawn down from investors on an as-needed basis.
I don't disagree. To clarify though, it's often LP's all the way down to the turtles...that is it is not uncommon that the limited partners in a limited partnership are limited partnerships because limited partnerships are a way of organizing capital that scales from a few hundred grand for 20 residential lots to a billion or so for a VC fund.
From the individual partners point of view, their investment fuss are committed upfront with the expectation that that commitment is adequate for the entire project. Should the funds prove inadequate the investor may not loose their shirt but will consider themselves lucky to escape with shortened sleeves.
From the individual partners point of view, their investment fuss are committed upfront with the expectation that that commitment is adequate for the entire project. Should the funds prove inadequate the investor may not loose their shirt but will consider themselves lucky to escape with shortened sleeves.
LPs are the investors from whom VCs raise their funds. The limitation they normally abide by, when investing through a partnership (like a VC), is that they aren't allowed to direct funds towards any particular investment.
So they can invest in a general thesis, but can't direct funds towards a specific company. The general partner (GP), typically an employee of the VC firm, manages the specific allocation of money into deals. The restriction to acting through a layer of management is a legal requirement in order to give the LPs the protections afforded by the LLP structure.
So they can invest in a general thesis, but can't direct funds towards a specific company. The general partner (GP), typically an employee of the VC firm, manages the specific allocation of money into deals. The restriction to acting through a layer of management is a legal requirement in order to give the LPs the protections afforded by the LLP structure.
Yes this is right. The limited partners are the investors in VC funds who provide the money. The general partners are the VC’s who are supposed to have the experience be able to decide which companies are the good investments. It is a bit of a worry if LPs think that they can do this on their own. Maybe they can, but historically whenever “dumb money” enters a market a crash is not far away.
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YC is doing the VC job by curating and selecting good bets. LPs can go straight to these deals and avoid the middlemen. How is that going to affect the traditional LP > VC > startup model? Will LPs go straight to "top" accelerators and invest directly on these startups?
I didn’t think that identifying the good bets was what YC was wanting to do? Sam mentioned a couple of days ago that if YC was doing their job right the median long term valuation of all YC companies should be 0 (i.e. more than half should fail). Unless you are able to invest in all YC companies, then as "dumb money" you are very likely to end up investing only in the duds.
this is of course, assuming that VC money is any smarter than LP money. But is it really? Many LPs are successful business people or investors themselves. VCs are closer to the action and get better deal flow, but keeping deal flow constant, they are no better at picking stocks than my betta fish
The top VC funds seem to display alpha, but I agree the vast majority of general partners would be better replaced with a monkey and a dartboard.
Some already skip the VCs. But a good VC should not be brushed aside lightly - especially some with certain domain expertise. The best VC firms generate great returns fund after fund. Although, if you can't get into one of these prestigious funds, you might find it more advantageous to invest alongside them if possible, thus not investing in a lower tier fund.
Who are the best VC firms and what are their returns?
LPs investing in startups directly, followed by retail investors (JOBS act).
If you thought we were already in a bubble, hang on to your seats, it's about to get much worse.
If you thought we were already in a bubble, hang on to your seats, it's about to get much worse.
The "worse" value judgement is debatable. LPs are high risk and have deep pockets, so I'm not worried about them.
As far as retail investors go, I am a bit concerned there but on the other hand anyone can blow money on lotto tickets or casinos and with those you're statistically guaranteed to lose.
I would like to see some requirement that retail investors are presented with a big fat warning that reminds them that this is a high risk investment and that they could lose all their capital. Granted they should know that, but people are biased and often forget.
Of course lotto tickets don't come with such warnings, so hey maybe it's fair.
My biggest concern isn't so much with the investor side but with what effect this might have on the signal/noise ratio in the startup world. I fully expect to see a ton of scammy shallow "companies" trolling for funds, and it'll make it harder on those with more substance than flash.
As far as retail investors go, I am a bit concerned there but on the other hand anyone can blow money on lotto tickets or casinos and with those you're statistically guaranteed to lose.
I would like to see some requirement that retail investors are presented with a big fat warning that reminds them that this is a high risk investment and that they could lose all their capital. Granted they should know that, but people are biased and often forget.
Of course lotto tickets don't come with such warnings, so hey maybe it's fair.
My biggest concern isn't so much with the investor side but with what effect this might have on the signal/noise ratio in the startup world. I fully expect to see a ton of scammy shallow "companies" trolling for funds, and it'll make it harder on those with more substance than flash.
Worse because unsophisticated investors ("family offices" and "moms and pops") will have unrealistic expectations.
Those expectations will have to meet reality sooner or later, and when that happens:
Those expectations will have to meet reality sooner or later, and when that happens:
* Life savings will be wiped out
* Liquidity will snap back for startups
* Many otherwise healthy companies will die
That's why I'm in favor of some level of standards on disclosure and some standard warning for these kinds of investments. Another possibility would be a waiting period. People are impulsive, so maybe you have to wait 72 hours from signaling serious intent to actually making an investment. That would help prevent casino-think.
I don't think it's wrong to open more investments to more people, but I'm also a bit wary of it being a total free for all shitshow.
I don't think it's wrong to open more investments to more people, but I'm also a bit wary of it being a total free for all shitshow.
>If you thought we were already in a bubble, hang on to your seats, it's about to get much worse.
"Worse" for whom? It may be worse for investors because valuations may increase, but overall having more money in the startup ecosystem, funding companies that may make the world a better place, isn't the worst possible thing to have.
"Worse" for whom? It may be worse for investors because valuations may increase, but overall having more money in the startup ecosystem, funding companies that may make the world a better place, isn't the worst possible thing to have.
It has a distorting effect on the industry, on tech culture, and on the communities that we live in. Easy money doesn't bring out the best in people.
Difficult or no money doesn't do that either.
Well someone has to be left holding the bag. I worry that done badly this will turn a generation off investing in tech start-ups.
I don't worry about people being turned off investing in startups. I think that would be a very good outcome, both for retail investors (they should be investing in broad indices, not picking individual sectors or stocks) and for the tech sector (less cash floating around = less talent being wasted at companies which would immediately shut down in less bubbly times).
Please don't worry. There will be no shortage of people who believe next time will be different. That's the beauty of the cycle. As you near the end, some subset of the people who swore they'd never be left holding the bag again become bag holders.
Yes people seem to have short memories these days. After 1929 it took a long time for people to think about investing in the stock market again.
What is probably more of an issue is that wide-scale bag holding will trigger new regulations that will make it much hard for startups to raise money in the future. Even if people want to invest it might prove impossible to raise money in practice.
What is probably more of an issue is that wide-scale bag holding will trigger new regulations that will make it much hard for startups to raise money in the future. Even if people want to invest it might prove impossible to raise money in practice.
This actually happened in biotech in the last 15 years. Everyone bought into the promise of genomics and it all blew up (not genomics itself, but the idea you can make oodles of cash from it).
The biotech IPO window was almost closed from ~2000 to 2012-2013. Look at it now! Companies with nothing more than a promise raising $150M+ at IPO. I haven't kept track, but it wouldn't surprise me if close to 100 biotechs have IPOed in the last 2-3 years.
The biotech IPO window was almost closed from ~2000 to 2012-2013. Look at it now! Companies with nothing more than a promise raising $150M+ at IPO. I haven't kept track, but it wouldn't surprise me if close to 100 biotechs have IPOed in the last 2-3 years.
Don’t I know this. As someone who runs a genomics company that started in 1999 I have been through this whole experience. When I started people were literally giving me money for free and by 2001 you could not raise a cent even if you were profitable.
Pretty close.
At least 121 from Jan 2013, to Feb 2015:
http://www.forbes.com/sites/brucebooth/2015/03/20/biotech-ip...
And the Nasdaq biotech index (NBI) has skyrocketed, from 1,000 four years ago, to a recent peak of 4,000 before the plunge (after having barely moved for a decade previously).
At least 121 from Jan 2013, to Feb 2015:
http://www.forbes.com/sites/brucebooth/2015/03/20/biotech-ip...
And the Nasdaq biotech index (NBI) has skyrocketed, from 1,000 four years ago, to a recent peak of 4,000 before the plunge (after having barely moved for a decade previously).
The cycle of getting burned than getting burned again is shorter than you'd think. Just look at the housing market in some US regions. "Come on! Housing will never go down here!"
Apparently most people's memories don't even go back as far as 2008.
Apparently most people's memories don't even go back as far as 2008.
Well for the time being, retail is likely going to be scarred from the correction in public markets that we are in the midst of.
For those unfamiliar with the term, a family office is (from my understanding speaking with a friend who manages one) a coordinated effort to manage wealth, ideally for current and future generations. At their more basic level they might passively invest in the share market and property, but they can be more active and pursue higher-touch investments in particular businesses, etc.
Slightly off-topic but is there any book or resource that a software engineer like me can read to understand the basics of how VC operate, what each round of funding mean, what one needs to know when one approaches a VC, difference between VC/LP?
Venture Deals by Brad Feld is great for how to fundraise and he does go over most of the basics and how things work.
Mark Suster, from Upfront Ventures, has a really great list of blog articles you can read about raising VC: http://www.bothsidesofthetable.com/pitching-a-vc/
This should give you a general idea of how VC's operate: http://founderequity.com/the-new-reality-of-venture-capital/
Mark Suster, from Upfront Ventures, has a really great list of blog articles you can read about raising VC: http://www.bothsidesofthetable.com/pitching-a-vc/
This should give you a general idea of how VC's operate: http://founderequity.com/the-new-reality-of-venture-capital/
Usually recommended:
http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalis...
http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalis...
I think it would be easier to get all these LP's, make a big fund and make follow-on investiment in all of companies portfolio.
better than a LP investing direct in a early-stage startup. This is bad for both, the startups gets an unexperienced investor and the LP don't get to manage portfolio the right way.
better than a LP investing direct in a early-stage startup. This is bad for both, the startups gets an unexperienced investor and the LP don't get to manage portfolio the right way.
>...VCs treated their LPs a bit like mushrooms, keeping them mostly in the dark...
The full phrase is to treat your <insert business relation> like mushrooms: feed them shit and keep them in the dark.
The full phrase is to treat your <insert business relation> like mushrooms: feed them shit and keep them in the dark.
Does this mean YC is shifting from an incubator to a more full fledged VC pipeline? Or is it just a lead generator for the YC companies to meet more investors?
Two fundamental business strategies are bundling or unbundling. Looks like bundling, not shifting from seed funding.
> One Midwest LP who represents a family office and began receiving invitations to these affairs last year – one year after he began investing in privately held tech companies – has already backed a dozen startups out of YC. They represent one-third of his current portfolio of direct stakes.
> “I find [YC’s] batches are always the best of any accelerator class or demo day that I attend,” says the LP, who asked not to be named. “I’ve found a number of opportunities that were as exciting as any we’ve pursued.” YC’s endorsement, he says, is “a very important signal to us.”
An admittedly more cynical reading of this:
* Family office LP has very limited experience investing in privately-held tech companies.
* LP relies heavily on signals like "YC participant" because LP brings no unique investing insight to the table in this area.
The vast majority of LPs have no business investing directly in startups because they have no ability to add value to the individuals and institutions they represent, are incapable of performing adequate due diligence, and don't have the bandwidth or experience necessary to manage these kinds of investments.
Whether or not the current turmoil in the public markets is the start of something bigger or not, LPs itching to make direct investments strongly suggests that we are at or close to the peak in the current tech investment cycle.
> “I find [YC’s] batches are always the best of any accelerator class or demo day that I attend,” says the LP, who asked not to be named. “I’ve found a number of opportunities that were as exciting as any we’ve pursued.” YC’s endorsement, he says, is “a very important signal to us.”
An admittedly more cynical reading of this:
* Family office LP has very limited experience investing in privately-held tech companies.
* LP relies heavily on signals like "YC participant" because LP brings no unique investing insight to the table in this area.
The vast majority of LPs have no business investing directly in startups because they have no ability to add value to the individuals and institutions they represent, are incapable of performing adequate due diligence, and don't have the bandwidth or experience necessary to manage these kinds of investments.
Whether or not the current turmoil in the public markets is the start of something bigger or not, LPs itching to make direct investments strongly suggests that we are at or close to the peak in the current tech investment cycle.
Yes but the LPs can hold the bag. Misquoting Joseph Kennedy when the shoe shine boy gives you stock advice then it is time to sell.
On this topic I spoke to my agent in China about the Chinese stock market back in May when it was going straight up. He told me that all the waiters were talking amongst themselves about what stock to buy, etc.
On this topic I spoke to my agent in China about the Chinese stock market back in May when it was going straight up. He told me that all the waiters were talking amongst themselves about what stock to buy, etc.
Isn't an LP just some person with a lot of cash but not enough cash to hire a VC firm..?
Wouldn't this just indicate that VC firms are charging too much for LP's to invest in a VC, or that there's some rich investors out there (LP's) who are willing to risk direct investments in small businesses, rather than investing blindly in the stock market?
Why would more direct LP investments indicate a peak in an "investment cycle"?
Wouldn't this just indicate that VC firms are charging too much for LP's to invest in a VC, or that there's some rich investors out there (LP's) who are willing to risk direct investments in small businesses, rather than investing blindly in the stock market?
Why would more direct LP investments indicate a peak in an "investment cycle"?
No, I don't think that's the primary driver here. I personally believe:
1. There's a broader trend of LPs moving to invest directly in alternative asset classes. There are a number of reasons for this. FOMO is one in this particular market.
2. Because the market is so hot, folks are more interested in ground-floor (seed stage) investments that are harder to get exposure to in traditional venture funds.
You must also realize that optimizing these direct investments is a PITA. Newbie direct investors are going to learn a lot of harsh lessons when it comes to pro rata rights in this market, assuming they even ask for and get them.
1. There's a broader trend of LPs moving to invest directly in alternative asset classes. There are a number of reasons for this. FOMO is one in this particular market.
2. Because the market is so hot, folks are more interested in ground-floor (seed stage) investments that are harder to get exposure to in traditional venture funds.
You must also realize that optimizing these direct investments is a PITA. Newbie direct investors are going to learn a lot of harsh lessons when it comes to pro rata rights in this market, assuming they even ask for and get them.
LP = Limited Partner
(I think)