LP Perspectives on the Future of Venture Capital

With Beezer Clarkson, Christa Williams-Collett, Kimberli Cavazos Haywood, and Monica Adractas

With the continued slowdown in the venture ecosystem, a pullback in LP capital for VC firms is likely. This environment can be especially tough for first-time fund managers from underrepresented groups—as limited partners could see them as risker, or unproven, bets. At the 2022 Carta Equity Summit, four LPs shared how they’re each navigating those trends. Christa Williams-Collett of Citi Impact Fund talked with Beezer Clarkson of Sapphire Partners, Kimberli Cavazos Haywood of Candide Group, and Monica Adractus of CPP Investments about the current and future states of the market.

Navigating the downturn as a first-time fund manager

After years of record-breaking capital allocated to venture, we’re now in the middle of a slowdown. For first-time fund managers, raising a second fund could require some new tactics to convince LPs to invest. But there are reasons to be optimistic, and ways to innovate, said Beezer. “Over the last few years, a multitude of ways to raise venture capital have come to market. It used to be a much narrower path, but now there are rolling funds, syndicates…there are many ways to get going.” Leaning on these new tools can help early fund managers more easily create a proof of work.

Taking the time to understand your audience is also crucial, according to Monica. “Not all LPs are the same,” she said. “Different LPs have different strategies and different ways venture fits into their overall portfolio and organization. Really understanding that will help you customize your differentiated message.” She also encouraged GPs to do that research at the institutional level. “These are very long-term relationships. We’re going to have turbulent times, and having a trust-based relationship will be more critical than ever.”

Predictions for the next 12 months, five years, and 10 years

In the current chilly climate, it can be tough to know how things will pan out. “The next 12 months will be survival of the fittest,” said Beezer. “It’s going to be tough. I think the back half of next year is when things are gonna be really tested.” And while the tougher environment will stretch startups thin, Beezer also sees it as an opportunity for the best companies to rise.

Kimberli agrees with the shorter-term outlook, but was quick to point out that the longer five-to-10-year outlook will likely be much better. “Looking back in 10 years, I imagine we’ll see the next 12 months as a speed bump,” she said. “We’re slowing down now so that we can go faster once we get past it, and it will result in a winner-driven environment. We’ve also seen venture democratize geographically, and I think venture in five years will be much broader than the past.”

Looking back in 10 years, I imagine we’ll see the next 12 months as a speed bump. We’re slowing down now so that we can go faster once we get past it, and it will result in a winner-driven environment.
Monica Adractas
Managing Director, Venture Capital and Growth Equity, CPP Investments

A shift in which performance metrics are looked at will also likely come, said Monica. “I feel like DPI took a backseat over the last few years to paper value and skyrocketing TVPI. A lot of LPs are over allocated to private equity and venture capital, and all of a sudden DPI is back in vogue.” As LPs are squeezed by capital calls against commitments, distributions back from existing GPs will become increasingly important, a trend she sees continuing into the next 12 and 18th months.

How LPs can support diversity

LPs are in a unique position to bring about change, as their support of diverse funds can have ripples of influence down the line. Underrepresented GPs back more diverse founders, who then go on to build diverse companies, which can help spread the wealth created by equity. “At CCP, we like to start with ourselves,” said Monica. “Across our employee base, we have 47% that self-identify as minority. It takes a ton of focus and energy to be very intentional about it.” For Monica, having a team that reflects your values is crucial.

The panelists agreed that consistent follow-up with their GPs has been helpful in understanding and influencing diversity initiatives. “The fundraising cycles and diligence moments serve as forcing functions for us to collect some of that data,” said Monica. “And in between fundraises, we sit down with our managers and have casual catch-ups and conversations. A lot of dynamics come out in those more informal discussions.”

Create more owners
In 2018, the #ANGELS hypothesized that the equity gap was worse than the salary gap. Carta has the data to help track and analyze what they called #TheGapTable. Together, we created the first ever report on equity distribution by gender and have continued to create it every year since. Equity is the largest lever for wealth creation in Silicon Valley and beyond; we believe it should be distributed equitably.