๐To summarize what seems complicated below, from the standpoint of LP (fund investors โ investors);
- VC fund products were relatively high-interest products at a time of low interest rates, and thanks to the huge liquidity introduced through them, venture/startup values also rose, lasting a long and good honeymoon period.
- GPs with strong performance have become mega-fund managers because LPs have invested more money. VC fund GPs are originally intended to endure a long fund period by looking at performance compensation in a 2% management fee + 20% performance fee structure, but as it has become a mega-fund, 2% of annual management fees are sufficiently satisfactory. Therefore, they only look for basic bread big deals that will accept large-scale investments.
- But from the perspective of pure financial investment LP, I invested in anticipation of a home run, but only basic bread came out. In this case, why invest in other alternative investment funds such as hedge funds, PE funds, bond funds, and infrastructure funds? Moreover, there are many high-interest products. The yield is high, the liquidity is limited, and unlike in the past, the types of other financial products for diversification of portfolios have increased a lotโฆ
- At least (new) small funds take risks in the spirit of Hungry, differentiate themselves with new initial deal sourcing and investment. One can expect one shot.
- Among these, the most common small funds are those that chase megafunds and bury them under the name of โclub deals.โ This is neither a strategy nor a strategy.
- When the picture looks complicated, itโs better to go back to where you first started and look at the whole thing. Why did VC investment come up? Give and take all transactions. The time has long passed for a GP who sells financial products called VC fund to develop a new and diverse product and provide it to LP customers. For the past 20 years, the vegetables and the rice. (Itโs not because yesterday was Jeongwol Daeboreum โ Five-grain rice with vegetables. ^^)
๐ฐ
โNow is the era of small fundsโฆ 20 years of low interest rates end, venture capital landscape represents, investment returns pressure intensifiesโ
- End of low interest rate era and current situation ๐
- Over the past 20 years, low interest rates have led to a 10-fold increase in venture investment, overheating the investment ecosystem
- Market chills as 2024 hits 24-year high interest rate
- Seed-stage companiesโ entry rate to Series A plunges from 45% to 20%, start-up survival crisis
- While many investors are on the run for large safe funds, this may not be the best option
- In 2021, many funds recorded high TVPIs on low-interest-based beta returns, but now face challenges
- Structural limitations of large funds ๐ข
- Alpha returns are limited due to increased AUM (operating assets) and profitability deteriorates
- โ2 and 20โ fee structure seeks revenue through scale-up
- Focus on limited deals that can accommodate large investments, reducing investment flexibility
- Increased risk by investing in companies that already reflect high valuations and high expectations
- Workforce structure that is proficient in networking and sales but limited in investment screening
- Limitations to GPโs unique insight creation during the three-year deployment
- New opportunities and benefits of small funds ๐ซ
- Create a favorable market environment for small funds with unique insights
- More differentiated investment opportunities due to less competition
- A small team structure that facilitates independent decision-making that enables faster investment
- The smaller the fund, the greater the return impact of each investment
- Unconsensual, free investment strategies
- Increased opportunities due to reduced competition in low-liquidity environments
- Two types of start-up fund managers and strategies ๐ฏ
- Type of joint investment with large funds
- facing a difficult situation at the moment
- Provide real value to founders limited
- a limitation that is limited to a simple intermediary role
- the type of pre-investment over large funds
- Opportunities increase during market contraction
- Unique insights enable bold bets
- Provides higher value to founders
- Avoid efficient markets such as San Francisco SaaS
- Future prospects and implications for investors ๐ฎ
- It reaffirms that the nature of venture investment is a high-risk group of assets
- Raising fundamental questions about the ability of large funds to achieve venture returns
- Highlight the importance of small funds with differentiated insights and bold investments
- Increase the likelihood of finding new opportunities in an inefficient market
- Itโs Time for LPs to Find True Venture Profits Rather Than Just Pursuing Safety
- Seizing new opportunities due to changes in the investment environment is emerging as a key competitive edge