David Clark’s Post

What should investors expect from the VC industry over the next 3-5 years when it comes to exits and performance? Rick Zullo, on X, has argued that there will be a greater divergence between VC funds, with the most successful ones producing even stronger performance, while the median fund return will reduce. I would agree with this as we are likely to see fewer, but typically larger, exits. It will become more important than ever to have meaningful exposure to the small number of winners that drive VC performance. We saw this divergence in VC fund performance very clearly after the 2008/09 financial crisis. As you can see from the chart below, it was the top-tier, established managers who make up our Core Manager cohort that massively outperformed as the market recovered. We have identified three key factors that we believe materially contributed to this outperformance: 1. Quality of portfolio companies. We know that VC is a power law asset class, but the distribution of returns is even more concentrated after a correction. The number of successful exits falls significantly and the small number of VCs able to back these companies will materially outperform. We usually see the best companies actually improve their competitive positioning during a correction. They become more capital efficient, increase market share and benefit from many of their competitors being unable to survive. 2. Availability of capital. In a downturn, even the very best companies will usually need to raise additional capital. As a VC, if you don't have the capital to support these companies and protect your ownership, then you are in trouble. The best VCs can still raise new funds even in the worst of markets and will have the capital to ensure their best companies survive. 3. Willingness to continue to invest during the most challenging periods. The best managers have the experience of managing through prior downturns as well as the confidence (and the capital) to take advantage of the opportunities that a correction creates. This means that they can double down on their best companies, often at attractive valuations, and also access market leaders they may have missed in prior rounds. We have seen a major flight to quality from LPs to date in 2024, with a small number of VCs responsible for the vast majority of capital raised. Unfortunately, this is shutting the stable door after the horse has bolted. Venture capital is a cyclical asset class - corrections are a feature, not a bug. This means that LPs need to construct a portfolio that not only captures the upside as the market rises, but is also resilient during a downturn.

What should investors expect from the VC industry over the next 3-5 years when it comes to exits and performance? Rick Zullo, on X, has argued that there will be a greater divergence between VC funds, with the most successful ones producing even stronger performance, while the median fund return will reduce. I would agree with this as we are likely to see fewer, but typically larger, exits. It will become more important than ever to have meaningful exposure to the small number of winners that drive VC performance. We saw this divergence in VC fund performance very clearly after the 2008/09 financial crisis. As you can see from the chart below, it was the top-tier, established managers who make up our Core Manager cohort that massively outperformed as the market recovered. We have identified three key factors that we believe materially contributed to this outperformance: 1. Quality of portfolio companies. We know that VC is a power law asset class, but the distribution of returns is even more concentrated after a correction. The number of successful exits falls significantly and the small number of VCs able to back these companies will materially outperform. We usually see the best companies actually improve their competitive positioning during a correction. They become more capital efficient, increase market share and benefit from many of their competitors being unable to survive. 2. Availability of capital. In a downturn, even the very best companies will usually need to raise additional capital. As a VC, if you don't have the capital to support these companies and protect your ownership, then you are in trouble. The best VCs can still raise new funds even in the worst of markets and will have the capital to ensure their best companies survive. 3. Willingness to continue to invest during the most challenging periods. The best managers have the experience of managing through prior downturns as well as the confidence (and the capital) to take advantage of the opportunities that a correction creates. This means that they can double down on their best companies, often at attractive valuations, and also access market leaders they may have missed in prior rounds. We have seen a major flight to quality from LPs to date in 2024, with a small number of VCs responsible for the vast majority of capital raised. Unfortunately, this is shutting the stable door after the horse has bolted. Venture capital is a cyclical asset class - corrections are a feature, not a bug. This means that LPs need to construct a portfolio that not only captures the upside as the market rises, but is also resilient during a downturn.

What should investors expect from the VC industry over the next 3-5 years when it comes to exits and performance? Rick Zullo, on X, has argued that there will be a greater divergence between VC funds, with the most successful ones producing even stronger performance, while the median fund return will reduce. I would agree with this as we are likely to see fewer, but typically larger, exits. It will become more important than ever to have meaningful exposure to the small number of winners that drive VC performance. We saw this divergence in VC fund performance very clearly after the 2008/09 financial crisis. As you can see from the chart below, it was the top-tier, established managers who make up our Core Manager cohort that massively outperformed as the market recovered. We have identified three key factors that we believe materially contributed to this outperformance: 1. Quality of portfolio companies. We know that VC is a power law asset class, but the distribution of returns is even more concentrated after a correction. The number of successful exits falls significantly and the small number of VCs able to back these companies will materially outperform. We usually see the best companies actually improve their competitive positioning during a correction. They become more capital efficient, increase market share and benefit from many of their competitors being unable to survive. 2. Availability of capital. In a downturn, even the very best companies will usually need to raise additional capital. As a VC, if you don't have the capital to support these companies and protect your ownership, then you are in trouble. The best VCs can still raise new funds even in the worst of markets and will have the capital to ensure their best companies survive. 3. Willingness to continue to invest during the most challenging periods. The best managers have the experience of managing through prior downturns as well as the confidence (and the capital) to take advantage of the opportunities that a correction creates. This means that they can double down on their best companies, often at attractive valuations, and also access market leaders they may have missed in prior rounds. We have seen a major flight to quality from LPs to date in 2024, with a small number of VCs responsible for the vast majority of capital raised. Unfortunately, this is shutting the stable door after the horse has bolted. Venture capital is a cyclical asset class - corrections are a feature, not a bug. This means that LPs need to construct a portfolio that not only captures the upside as the market rises, but is also resilient during a downturn.

What should investors expect from the VC industry over the next 3-5 years when it comes to exits and performance? Rick Zullo, on X, has argued that there will be a greater divergence between VC funds, with the most successful ones producing even stronger performance, while the median fund return will reduce. I would agree with this as we are likely to see fewer, but typically larger, exits. It will become more important than ever to have meaningful exposure to the small number of winners that drive VC performance. We saw this divergence in VC fund performance very clearly after the 2008/09 financial crisis. As you can see from the chart below, it was the top-tier, established managers who make up our Core Manager cohort that massively outperformed as the market recovered. We have identified three key factors that we believe materially contributed to this outperformance: 1. Quality of portfolio companies. We know that VC is a power law asset class, but the distribution of returns is even more concentrated after a correction. The number of successful exits falls significantly and the small number of VCs able to back these companies will materially outperform. We usually see the best companies actually improve their competitive positioning during a correction. They become more capital efficient, increase market share and benefit from many of their competitors being unable to survive. 2. Availability of capital. In a downturn, even the very best companies will usually need to raise additional capital. As a VC, if you don't have the capital to support these companies and protect your ownership, then you are in trouble. The best VCs can still raise new funds even in the worst of markets and will have the capital to ensure their best companies survive. 3. Willingness to continue to invest during the most challenging periods. The best managers have the experience of managing through prior downturns as well as the confidence (and the capital) to take advantage of the opportunities that a correction creates. This means that they can double down on their best companies, often at attractive valuations, and also access market leaders they may have missed in prior rounds. We have seen a major flight to quality from LPs to date in 2024, with a small number of VCs responsible for the vast majority of capital raised. Unfortunately, this is shutting the stable door after the horse has bolted. Venture capital is a cyclical asset class - corrections are a feature, not a bug. This means that LPs need to construct a portfolio that not only captures the upside as the market rises, but is also resilient during a downturn.

What should investors expect from the VC industry over the next 3-5 years when it comes to exits and performance? Rick Zullo, on X, has argued that there will be a greater divergence between VC funds, with the most successful ones producing even stronger performance, while the median fund return will reduce. I would agree with this as we are likely to see fewer, but typically larger, exits. It will become more important than ever to have meaningful exposure to the small number of winners that drive VC performance. We saw this divergence in VC fund performance very clearly after the 2008/09 financial crisis. As you can see from the chart below, it was the top-tier, established managers who make up our Core Manager cohort that massively outperformed as the market recovered. We have identified three key factors that we believe materially contributed to this outperformance: 1. Quality of portfolio companies. We know that VC is a power law asset class, but the distribution of returns is even more concentrated after a correction. The number of successful exits falls significantly and the small number of VCs able to back these companies will materially outperform. We usually see the best companies actually improve their competitive positioning during a correction. They become more capital efficient, increase market share and benefit from many of their competitors being unable to survive. 2. Availability of capital. In a downturn, even the very best companies will usually need to raise additional capital. As a VC, if you don't have the capital to support these companies and protect your ownership, then you are in trouble. The best VCs can still raise new funds even in the worst of markets and will have the capital to ensure their best companies survive. 3. Willingness to continue to invest during the most challenging periods. The best managers have the experience of managing through prior downturns as well as the confidence (and the capital) to take advantage of the opportunities that a correction creates. This means that they can double down on their best companies, often at attractive valuations, and also access market leaders they may have missed in prior rounds. We have seen a major flight to quality from LPs to date in 2024, with a small number of VCs responsible for the vast majority of capital raised. Unfortunately, this is shutting the stable door after the horse has bolted. Venture capital is a cyclical asset class - corrections are a feature, not a bug. This means that LPs need to construct a portfolio that not only captures the upside as the market rises, but is also resilient during a downturn.