Over the last decade or so, many venture capitalists have built vast personal fortunes. Some of the money has been made through investments in companies that have outperformed. But much of their wealth traces to management fees that added up quickly as fund sizes —  raised in faster succession than ever in history — ballooned to unprecedented levels.

Given that the market has changed — and will likely remain a tougher environment for everyone for at least the next year or two — an obvious question is what happens now. Will the industry’s limited partners — the “money behind the money” — demand better terms from their venture managers, just as VCs are right now demanding better terms from their founders?

If ever there was a moment for the institutions that fund VCs to use their leverage and push back — on how fast funds are raised, or the industry’s lack of diversity, or the hurdles that must be reached before profits can be divided — now would seemingly be the time. Yet in numerous conversations with LPs this week, the message to this editor was the same. LPs don’t dare rock the boat and put their allocation in so-called top tier funds at risk after years of solid returns.

They aren’t likely to make demands on poorer performers and emerging managers either. Why not? Because while the latter groups might be provided more time and capital in a go-go market, LPs are simply pulling back from them right now, given their own market-induced cash constraints. (“Markets like these exacerbate the divide between the haves and have-nots,” observed one LP. “When we add someone to our list of relationships,” added another, “we expect it’s going to be for at least two funds, but that doesn’t mean we can can live up to those expectations if the markets are really tough.”)

Some might find the feedback frustrating, particularly following so much talk in recent years about leveling the playing field by putting more investing capital in the hands of women and others who are underrepresented in the venture industry. Underscoring LPs’ precarious relationship with the VCs who manage their venture allocations, none wanted to speak on the record.

But what if they had more backbone? What if they could tell managers exactly what they think without fear of retribution? Here are half a dozen gripes that VCs might hear, based on our conversations with a handful of institutional investors, from a managing director at a major financial institution to a smaller fund of funds manager. Among the things they’d like to change, if they had their druthers:

Weird terms. According to one limited partner, in recent years, so-called “time and attention” standards — language in limited partner agreements meant to ensure that “key” persons will devote substantially all their business time to the fund they are raising — began to appear less and less frequently before vanishing almost completely. Part of the problem is that a growing number of general partners weren’t focusing all their attention on their funds; they had, and continue to have, other day jobs. “Basically,” says this individual, “GPs were saying, ‘Give us money and ask no questions.’”

Disappearing advisory boards. A limited partner says these have largely fallen by the wayside in recent years, particularly when it comes to smaller funds — and that it’s a disturbing development. Such board members “still serve a role in conflicts of interests,” observes the LP, “including provisions around that margins that have to do with governance,” such as “people who were taking aggressive positions that were sloppy from an LP perspective.”

Hyperfast fundraising. Many LPs were receiving routine distributions in recent years, but they were being asked to commit to new funds by their portfolio managers nearly as fast as they were cashing those checks. Indeed, as VCs compressed these fundraising cycles — instead of every four years, they were returning to LPs every 18 months and sometimes faster for new fund commitments — it created a lack of time diversity for their investors. “You’re investing these little slices into momentum markets and it just stinks,” says one manager, “because there’s no price environment diversification. Some VCs invested their whole fund in the second half of 2020 and the first half of 2021 and it’s like, ‘Geez, I wonder how that will turn out?’”

Bad attitudes. According to several LPs, a lot of arrogance crept into the equation. (“Certain [general partners] would be like: take it or leave it.”) The LPs argued that there’s much to be said for an even, measured pace for doing things, and that as pacing went out the window, so did mutual respect in some cases.

Opportunity funds. Boy do LPs hate opportunity funds! One of the first reasons they find these annoying is that they consider these vehicles — meant to back a fund manager’s “breakout” portfolio companies — as a sneaky way for a VC to navigate around his or her fund’s supposed size discipline.

A bigger issue is that there is “inherent conflict” with opportunity funds, as one LP describes it. Consider that as an LP, she can have a stake in a firm’s main fund and a different kind of security in the same company in the opportunity fund that may be in direct opposition with that first stake. (Think of a scenario in which the LP is offered preferred shares in the opportunity fund, meaning her institution’s shares in the early-stage fund get converted into common shares or otherwise “pushed down the preference stack.”)

Not last, the LPs with whom we spoke complained that in recent years, they have routinely been forced to invest in VCs’ opportunity funds in order to access their early-stage funds, even while the early-stage funds was all that interested them.

Being asked to support venture firms’ other vehicles. Numerous firm have rolled out new strategies that global in nature or see them investing more money in the public market. But LPs don’t love the sprawl (it makes diversifying their own portfolios more complicated). They’ve also grown uncomfortable with the expectation that they play along with this mission creep. Says one LP who is very happy with his allocation in one of the world’s most prominent venture outfits but who has also grown disillusioned with the firm’s newer areas of focus: “They’ve earned the right to do a lot of the things they’re doing, but there is a sense that you can’t just cherry pick the venture fund; they’d like you to support multiple funds.”

The LP said he goes along to get along. The venture firm told him that if its ancillary strategies weren’t a fit, it wouldn’t count the decision as a strike against him, but he doesn’t quite buy it, no pun intended.

Yet the limited partner and others who fund the venture industry might grow less timid over time. For example, in a separate conversation earlier this week with veteran VC Peter Wagner, Wagner observed that during the dot.com crash, a number of venture firms let their LPs off the hook by downsizing the size of their funds. Accel, where Wagner spent many years as a general partner, was among these outfits.

Wagner doubts the same will happen now. Accel was narrowly focused on early-stage investments at the time, whereas Accel and many other outfits today oversee multiple funds and multiple strategies into which they can deploy what they’ve raised.

But if their returns don’t hold up, LPs could get fed up and take action, Wagner suggested. “It takes quite a number of years to play out,” he noted, and years from now, “we might be in a different [better] economic environment.” Perhaps the moment will have passed, in short. If it hasn’t, however, if the current market drags on as is, he said, “I wouldn’t be surprised at all if [more favorable LP terms] were under discussion in the next year or two.”



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