Santosh was describing what happens when a mega fund shows up, hoovers up most of a round, and prices it somewhere that makes you wince. I cut in. Twelve years in this business and I’ve never made an investment where the price felt comfortable. Either it looked a little pricey, or it looked cheap for a reason and the reason was a lot of “hair” and risk I was signing up to carry. What I said on the tape: “Anything that felt like, I’m getting a great deal on, it was just okay.”
I didn’t learn that in the recording but what the hour did was show me why it holds. If the price never feels right, then price discipline isn’t the discipline, and the mega fund conversation almost never gets around to naming what is.
We opened on the question we both get on every podcast we do. Mega funds: is that real venture? It’s become a purity test, and I said so in the first two minutes. The useful question is how you succeed in an industry that’s always going to have a bigger player in the room.
Santosh brought the history and it’s worse than I remembered. Funds of $500 million and up were already taking 44% of all venture raised in 2018, before anybody had a billion dollar vehicle. By his count 90% now goes to categorically established firms.
The part I keep chewing on is pacing. When I got into this, the craft had a rhythm I compared to musicians in the 1960s and 1970s. No album for three or four years, because some life has to happen in between that you can be inspired by and then actually execute on. That went away. Firms went from $500 million to a billion to two billion and deployed it in about a year, and they were having new funds pop up more than Lil Wayne had mixtapes in the early 2000s.
The mechanics under that are the real story. More AUM means more layers. More GPs, more junior partners, more principals, more VPs. Then you have to pay all those people against something you can measure, and what you pay them for is deployment. I said it plainly on the tape: your performance is determined by how much capital you deploy, not companies you see, not great deals you do. Santosh calls it velocity of capital. It isn’t a style choice, it’s a comp plan, and a correction doesn’t fix a comp plan.
Which brings me back to what the discipline actually is. I tell our team to underwrite for our own interest when a new price shows up, not for the whole cap table. That’s supposed to require conviction about a number. I also just said no number ever felt right. The way I hold both is that the conviction is about the company and the window, not the entry. I’m not fully settled there, and I said as much on air.
The best idea in the hour is Santosh’s, not mine. It’s about something mega funds structurally cannot do and smaller firms can, and it’s the one place in this whole conversation where the asymmetry runs our way. I’d rather you hear him lay it out than read my compression of it. It starts around the 32 minute mark.
I wrote in Blue Cars about liquidity not coming back the way people assume it will. This is the operator version of the same problem.
Also in this one, Javad Mostofizadeh of WilmerHale on what fund formation actually involves, start to finish. Worth your time if you’re standing up a first fund.
Listen here: https://carryonpodcast.com/podcast/thats-not-venture/
with gratitude,
Earn Sweat