Aileen Lee on Investor Exodus and Unicorn Struggles - Venture Capital

The Aftermath of the Boom-and-Bust Cycle in Venture Capital

A recent episode of the StrictlyVC Download podcast featured Aileen Lee, a seasoned venture capitalist, who highlighted a significant outcome of the recent market fluctuations. Numerous companies are currently facing difficulties not only due to raising capital at inflated valuations but also because they have lost the support of the investors who initially believed in them.

Limited Partner Concerns

Lee discussed the reluctance of limited partners (LPs) to openly critique prominent fund managers, stemming from a fear of being excluded from future investment opportunities. However, she posited what LPs would express if unconstrained:

“There’s a strong desire to invest in well-known funds, which often prevents constructive criticism due to potential repercussions. Discussions likely occur privately, but the core concern is that many individuals hired by venture firms during the period of zero interest rate policy (ZIRP) made a series of poor investment choices.”

The Impact of Rapid Hiring

Lee observed that these investors are now being sidelined, but the timing is problematic. “A substantial amount of LP capital has essentially been lost because the investment professionals weren’t retained long enough to assess the long-term viability of the companies they funded.”

She clarified that this isn’t necessarily a failing of the newer investors themselves. “A large number of individuals lacked adequate training, mentorship, or apprenticeship experiences before being entrusted with investment capital. Consequently, numerous investments were made, resulting in a significant number of orphaned companies.”

Abandonment by Senior Partners

Another contributing factor to startups being left unsupported, according to Lee, is the withdrawal of senior general partners. These partners, who initially led the investments, remain with their firms but have ceased active participation in board meetings.

This pattern has persisted for years in some instances. The thoroughness of due diligence was compromised during the peak funding period of the COVID-19 pandemic, and this lack of rigor continued with subsequent investments. This situation is a key reason why an increasing number of companies are struggling to secure assistance with exit strategies, and why LPs have legitimate grounds for increased dissatisfaction.

Fiduciary Responsibilities

Jason Lemkin, another experienced VC, echoed these concerns in late 2022. He questioned the lack of oversight when VCs stopped attending board meetings of underperforming startups. “[S]houldn’t there be appropriate checks and balances in place? Significant funds from pension plans, universities, and individual investors are at stake, and failing to conduct due diligence both initially and continuously at board meetings represents a potential breach of fiduciary duty to LPs.”

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