Dry Powder in Venture Capital, VC Ratings, and more with Grady Buchanan and Victor Gutwein | E1895

TL;DR

VC dry powder should be actively managed rather than left idle, with LPs questioning how managers use fees, reserves, and time when deployment slows. The discussion cites a record $300 billion in VC dry powder in 2023 and notes that 45% of top-quartile funds remain in the top quartile. Read on for Grady Buchanan and Victor Gutwein’s views on capital returns, manager selection, and persistent performance.

Transcript

today everyone's a GP everyone raised a fund in the past or they're still trying to raise a fund and they all a lot of them seem somewhat similar and it's hard for us to separate signal from the noise right as LPS especially when you're a smaller fund to funds and every everyone's coming at you to try to raise Capital much less the bigger guys that... Read More

Key Insights

• 💪 Access to top VC funds is highly desirable due to their ability to consistently deliver strong returns.
• 🎭 Persistence of returns in VC funds is significant, with top quartile funds continuing to perform well in future funds.
• 😤 Picking the right VC funds is essential for LPs, taking into account qualitative factors such as reputation, team building, and strategy alignment.

Questions & Answers

Q: How should LPs evaluate venture funds holding large amounts of dry powder?

LPs should establish a regular cadence with managers, at least quarterly in NVNG’s case, and ask why capital remains undeployed. They should also examine how managers are using their time, effort, and continuing management fees to create value beyond immediately investing in companies.

Q: How much VC dry powder was available in 2023?

The discussion cites an Financial Times report stating that VC dry powder reached a record $300 billion in 2023. This large cash pile raised questions about managers conserving capital while continuing to collect management fees.

Q: What options does a fund manager have when sitting on 50% reserves near the end of an investment term?

The manager could try to reach reserve targets quickly, push capital toward later-stage managers, or otherwise explain how continuing management fees will benefit LPs. If the investment term is ending, returning some capital may also become part of the conversation.

Q: Will venture capital firms return undeployed capital to LPs?

Grady Buchanan does not expect or hope for capital returns specifically from NVNG’s $50 million fund. For larger, more established managers and the broader market, however, he hopes prudent decisions may include returning capital and freeing allocations for new investments.

Q: Why might venture fundraising cycles become longer?

Many funds raised substantial amounts, made good or bad investments, and still retain roughly half of their capital. The speakers suggest this could lengthen fundraising cycles toward patterns seen more than 10 years ago and potentially lead some capital to be returned to LPs.

Q: How important are access and fund selection for venture capital LPs?

Access matters because top-performing venture funds show persistence: the cited University of Chicago study found that 45% of funds achieving top-quartile returns remained in the top quartile. Fund selection still matters, particularly for smaller funds of funds trying to separate credible managers from a crowded field.

Q: What qualities help LPs distinguish promising general partners?

Promising general partners can clearly explain what they are building, where they came from, how the industry has changed, and how they intend to position themselves for the future. The existing analysis also highlights strong networks, differentiated strategies, successful track records, reputation, team building, and long-term vision.

Q: Who are Grady Buchanan and Victor Gutwein?

Grady Buchanan formerly managed the venture portfolio for the Wisconsin Alumni Research Foundation, described as a $3 billion institution, and later co-founded NVNG, a venture fund of funds. Victor Gutwein is the managing partner of Chicago-based M25, which had backed 140 seed- and pre-seed-stage startups, including Kin Insurance, Astronomer, and Loop Returns.

Summary & Key Takeaways

• LPs are struggling to separate signal from noise in the crowded VC market, making access to top funds crucial.

• The University of Chicago study shows that 45% of funds that achieve top quartile returns continue to perform in the top quartile, highlighting the persistence of returns.

• Picking the right funds is also essential, as qualitative factors such as reputation, team building, and long-term strategy can contribute to their success.

• Investments should focus on funds with strong networks, differentiated strategies, and successful track records.