Economic innovation for a bright new world
Clueless San Francisco
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Why documents don't protect LPs
Even then. The actual deployment of risk can be and has been shoved under the rug of these generic and non-specific documents. These documents are not only lacking in the definition of risk, but severely lack controls to allow you as an LP to measure their compliance. And that is exactly why risk has deflated to uniformity and thus subprime Venture Capital.
Our reply above is a response to the representative’s reply (posted in full below) based on the aforementioned article:
“You should be able to be informed with:
1. Copies of the Limited Partnership tax returns.
2. Copies of Financial Statements with assets Marked-to-Market.
3. Copies of Minutes of General Partner meetings.
I am not an attorney, but usually General Partners have a fiduciary duty to provide at least these 3 items to Limited Partners. A review the Operating Agreement should provide information with the protocols for obtaining such info. Check how often you will receive these BEFORE making such an investment.”
The full article is available on the iCFO group on LinkedIn here
.Debt financing in startups
And Gene Lee, Managing Director of Cove Point Holdings, a Family Office describes my views exactly in an interesting article published by Axial Market. Specifically he emphasizes how financial debt in a smaller middle market business can be very risky and limit the operating flexibility and growth prospects of a business.
We don’t believe that it makes sense to compound the operating risk of growing a smaller company and the risk from an ownership transition with the risk of a leveraged capital structure that could have bad consequences for a company if it misses a beat.
Primarily startups that work with subprime Venture Capitalists that have fragmented their investment risk and from the beginning do not have the ability to support the runway to upside completely are subject to the “blessings” of debt financing. The life-line of debt financing entering the startup world is an indicator of how subprime Venture Capital, downside investing, and the fragmentation and deflation of risk erodes the opportunity for groundbreaking innovation.
Now, If we could only design an economic system that translates the sanity from these kinds of Family Offices into a Venture Capital playbook. Perhaps that is why this Family Office is going direct.
Read the full article here
.ILPA measures
) has done to structure the relationship between Limited Partners and General Partners. I have read their referendum and am not against the work of the ILPA, but feel the work of the ILPA so far offers little suggestions as to how to solve the systemic issues within the asset management realm (see “The musical chairs of asset management”). Yes, I do commend the ILPA for establishing "dining" etiquette, but it does not change the fact that the food being served is subprime. The way we construct financial systems (in violation of the free-market principles we boast about), by economic principle turns the discovery and arbitrage of the underlying asset subprime (sooner or later). Already in VC 10 levels of bottom-heavy diversification proliferate lies about the real risk deployed in Venture. And the results show it. VC fails to make a dent in the 80% greenfield of technology adoption, nor produce returns for LPs in line with that gap. So, while there are pragmatic things we can do with LPs to start to eradicate those economic lies (as described in my article), a much more fundamental change to the relationship and structure between GPs and LPs can turn their subprime alignment from subprime to prime. Transparency is just a (small) part of the economic framework, and even then the kind of transparency is paramount in establishing a different economic outcome of risk.
And below is the original comment from a Limited Partner (in hotel real estate) on LinkedIn
(members only) to which the above was my response:The Institutional Limited Partners Association has established a set of "best practices" that center around three guiding principles: 1) alignment of interests; 2) Governance; and 3) Transparency. Logically, if the GP has significant skin in the game by investing along side of the LP there is a higher likelihood they will be more selective in choosing where to deploy capital. The tenets of corporate governance can require a solution for many of the problems Georges discusses. These procedures can mitigate or eliminate conflicts of interest and related party transactions. And finally, if all the cards are on the table, readily seen by all parties, the dialogue becomes real and meaningful. The level of trust goes up and everyone benefits from an open, honest assessment. I am in the hotel real estate sector and we have adhered to similar principles for years. While not in total agreement with the ILPA, their efforts are to be commended as an attempt to bring some measure of standards to the industry.
Scaling is hard
So, here is my response to the article to set Jeff straight:
Yawn, another article from a VC hoping to educate people to become entrepreneurs. Venture is just like American Idol, you find quality - you don't teach singing. People either have the talent or they do not. And Jeff's article(s) reminds me of the desperate Moms who keeps pushing their child to sing, even though when they open their mouth, we all recognize they can't. Not everybody can be an entrepreneur, but an entrepreneur can come from anywhere. The quest is to find prime, not teach subprime. But the real issue in Venture is that Venture Capitalists have not found a way to scale themselves in line with an 80% adoption greenfield and more quality entrepreneurial capacity than ever before. VCs are being beaten and disproven in their assessment of best practices by corporates more and more often. With negative returns on the whole for Limited Partners and perhaps a handful of VCs (out of the 790 post 911 dead weights) making any money monolithically and systemically for LPs, not the quality of entrepreneurial capacity is in question, but the arbitrage of that innovation deployed by VC.So, if Jeff was a wise man he would write an article that describes how Venture Capitalists can scale to detect and entice the entrepreneurial capacity they currently discard as false negatives. And explain why Venture Capitalists with many diversifications built in a period when corporate innovation proves their excuses wrong, really deserve to make any suggestions to budding entrepreneurs.
The original article with my comment can be found here
.