Only 5% of Funds Survive to Fund VIII | Beezer Clarkson on Venture's First Contraction in 20 Years

It's fine with me if you say I don't know how this is going to work out, but here's what I'm watching, here's what I'm learning. I don't know how it's going to work out either, but just saying it's all going to be fine. That to me, I think I'm more sensitive to as an LP personally when I'm talking to folks now, denial of reality, which to me is a little bit of a red flag it's the.

Week of February 2nd. Welcome to the Learning Corner, a Precursor Ventures podcast. Welcome to the Learning Corner by Precursor. I'm Mia Farnam and I'm joined by our GP and Managing Partner Charles Hudson. We will be talking through the articles and Goodreads that caught our team's attention over the past week. For our first topic, Beer Clarkson from Sapphire Partners wrote a blog post on LinkedIn titled I see dead VCs. And instead of just Charles and me chatting this one through, we have something ten times better. Beezer herself joining the Pod. Welcome Beezer. Thanks so much for jumping in today.

Oh thanks so much for having me. I love your guys Pod. It's an honor to be here.

Along with being a partner at Sapphire, you're also the co founder of Open lp, a GP LP Insights resource powered by Sapphire Partners, and the co host of another great podcast, Origins. But your blog post IC Dead VCs. It was an analysis that your team conducted on the current market as it pertains to fund managers, with the key highlight that for the first time in 20 plus years, we're facing the first substantial firm contraction across venture and the title of the piece is derived from that phenomenon. According to PitchBook, more than 10,000 VC firms technically exist, but fewer than half of them are actually investing. The rest are what we call zombie funds. And you walk through the odds of survival as a fund manager. And while raising fund one is incredibly challenging for anyone, it's clear that building a repeat flywheel of funds thereafter is equally so. There were some strong data points, one of which was only half of all fund ones survive to raise a second fund. Another one was roughly 17% of firms make it to Fund 4, which is deemed established, and then fewer than 5% of funds make it to Fund 8, with less than 1% growing to become franchise funds thereafter. The statistic that fewer than 5% of fund managers reaching that Fund 8 really reinforces how difficult it is to build an enduring fund franchise. Beezer wanted to ask you first, what are the biggest shifts in expectations as you graduate fund over fund that make it so hard to stay in the market.

Well, thank you. And you know, I live this and I've been doing ventures since the 2000s. It is still shocking to me how hard it is. For what it's worth, I think it's hard. That's why we run the numbers, because it helps us to really dig into what's going on. And when I think about your question, I first and foremost, I think there is a bit of an expectation evolution. I think you're right in how you would phrase that. And I was trying to think through the different parts of it because the non negotiable is always what deals are you doing. But over time you get a lot more clarity as an LP into the strength of the deals. And it doesn't have to be everybody's cup of tea, but how are the companies doing? So the first pass is really a lot more around. Did you say what you're going to do? And people that deviate immediately from their pitch deck. I know I'm being very. I'm going to stereotype and overgeneralize here. That's really hard. So there's always some missteps right there. And so the doing what you said you do is important. And then understanding over time who your LP base is and what they expect that to mean. From how your firm matures as far as is it adding people, is it adding operational capacity, what's in line with their expectations? And if you're seeing something that they're not seeing that is completely typical, it happens all the time. But bring them along on the journey because the places where I think I've seen things break, clearly bad investing does not help. Let's just be blunt, doesn't work if your companies aren't successful. But I've also seen funds lean into areas of momentum and try to take on too many things. Too big of an expansion, too many pivots, too many. Now we're this, now we're that. And then when things go sideways because the market changes outside of whatever they can do or some of their best weren't great, you can lose your LP base because the underlying portion of this is there is an art to LP management. And you know, if you're an established name, it does look like everything's easy. I bet even they would say there's an art to it. But certainly the first four to five years and you guys could actually explain it a lot better from on the ground what that art looks like. But you have to bring your LP base along with you or bring in new people. And the, the cognizance of that and just working with it I think is also part of what trips people up.

Charles, do you want to speak on the GP sign on Boots on the ground there?

Yeah. I mean Beezer is one of the first people I pitched when I was first getting started. So I think in the beginning as a fund manager, oftentimes LPs will tell you things but you don't hear it because you don't understand the way they communicate or you don't understand what it is that they're trying to tell you about your firm, your model or Beezer is far more clear than many people I've spoken with. I also just think it's hard to know who your people are when you're starting a fund manager because all of your friends will say, hey, have you talked to so and so lp? And it could be some big massive fund of funds that wants to do funds that are 250 million or greater objective, effectively an amazing LP, but probably not right for your 15 million dollar fund one. So I think what ends up happening is it's kind of like being in a startup that's doing customer discovery. You have this thesis of who you think is going to find your fund interesting. And I think the other thing is there's the like people who like your strategy and there's the people who like you as a person. And sometimes there's not a perfect overlap between those two categories. And what I always tell people in the beginning is figure out who really understands and believes in your strategy. Like for us we found a pocket of LPs early who were like, your portfolio construction doesn't concern us. We think for what you're doing this makes sense. And I think it takes a lot of fund managers, I mean a year or two to figure out what are the leading indicators that an LPM talking to is going to find the thing I'm doing. It could be strategy, it could be portfolio construction, it could be team construction, it could be specialists versus generalists. Like there's a bunch of things that once you figure out our fund works for people who like this bundle of attributes, but I think in the beginning as a fund manager, you don't even know how to articulate what that bundle of attributes is. So you're kind of stumbling around trying to find people who will say yes. And it's very inefficient, very inefficient.

And that's just speaking specifically about being an emerging manager. Charles, I know we've internally talked about what does it look like when you evolve and become quote, unquote established, that 14% who make it actually to this quote unquote established fund cohort. So from your perspective, what sets apart that 14% who make it to fund 4 into this group that I, I think people still struggle with knowing am I actually established? Even though I've raised successfully four funds in.

No, I agree with you. It's. It still feels very early days. I would also say this is an old person caveat. It used to be funds raised every three to four years. So by fund four, you're over a decade in and especially in 2021. And even now there's such a compression, you can be fund four and be five years old. You may have an established LP base, which is what people use to determine do you have institutional P.S. to determine if you're emerging or established. But you could still be very new. And I think what people don't always appreciate is that LPs want to understand how companies have grown. You know, if you're investing your fund three, but you just have a brand new company, it's pre seed, it's, it's a legit baby.

Yeah.

And so it's going to be really hard for the LPs to diligence what that means. And so I think sometimes these fundraising challenges are service. One hand's running in and the other hand's like, whoa, I'm trying to understand what's going on. And again, I get the need to fundraise when it's the present, because trying to raise when there's no money feels terrible. You see these folks just getting stuck in some of these challenges because LPs. Yeah, Charles, you said it so well. We speak a different language.

Yeah.

And not intentionally, but we do.

It's like most languages, once you learn to decode it, it is actually quite clear what people are telling you. It's just you don't have the key. And, you know, most of our first set of funds were two years apart and we moved to three just because I realized in a world where it takes four years to get from precede to Series A, you might need two full fund cycles to know what happened two fund cycles ago. And I was like, well, if you can make that more three, at least by the time you go out for the third fund, you know something about the portfolio and the first fund. And, you know, we had the fortune of being born as a firm at a time when things were Good from sort of 2014 to 2020. And there wasn't as much concern. And I'd say the last five years it's been the opposite. There's a lot of concern about like, hey, decisions made in a different era, in a different time period. Are those decisions still as good as we thought they were two or three years ago?

And I know Charles, you released a piece on kind of exploring two different deserts. So one, when you were an emerging manager, now that you're established, and I know you mentioned Beezer, especially in the beginning of the days, but anything else, you want to kind lean in as you think about what established fund means.

The other part that I think I really respect is a lot of things to juggle as a GP, because part of what LPs will also start looking at as funds evolve from 4, 5 and 6 is what's the team and how's the team growing and what's the strength of the next generation? Is that relevant? Is it not relevant? You can start dissecting track record. That's a lot to be doing while you're still just trying to do great deals. And then to Charles's point, the market can shift as to what they want to fund. When and is is consumer in, is fintech in are your company's gonna have? It's just, I mean, I legitimately appreciate it. It is a lot. And that's part of what I think is the pressure points from like 4 to 8, these things because you do have more time. And then rightly or wrongly, LPs will perceive with data, I can start doing analysis and they'll ask a bunch of questions. And it depends on what people like. Some people like a lot of tvpi, some people like consistency. You can complain about the exit market, all those things.

It is kind of jarring because I feel like when you're on funds one through three, and depending on the Peter's point, if you raise them in rapid succession, I think there's this like, I just want to stay alive and remain a venture capitalist phase where I think the questions of succession, firm building, they feel very like academic because who cares about Fund 5 if I can't get Fund 2 done? And yes, I want to think about the bench and talent, but I'm on fund three and I can barely cover the firm's operating expenses with our management fee. And so it's really funny, this weekend one of my GP mentees called me. They're going to hire their first associate and they had all these questions and I could just tell they were really anxious and they're like, you seem very calm. Well, I've heard I've done this six times. And so I remember how nervous I was the first time I brought somebody onto our team in an investing role. Now that I've done it a bunch of times, it just isn't as stressful of a thing for me as it is for you. So I'm trying to put myself back into that mindset. And all of a sudden, as you know me, I spend a lot of my time now thinking much more about the firm people we have on our team. Are they in the right roles? Am I doing everything I can to learn what I want to learn about them as investors? Am I giving them enough opportunity to demonstrate taste? These are not things I spent nearly as much time on five years ago. And our LPs ask us different questions. They don't ask me as much about, do you think you're going to get the next fund? It's like, well, are you sure that keeping your fund the same size and is there enough capital in the model for the people on your team to also. They're just really different questions. And in some ways it's like starting over. Because now all the questions, I had good answers for all the old questions because you get a decade to practice and learn. Now I'm like, we have new questions and the answers are different and they're not as programmatic. They end up being more personal, more about like, what do you want and what have you learned about yourself as a fund manager in the last decade and how do you want to apply those lessons to the next 10 years?

Last question for you, Beezer. This is the first substantial industry wide contraction adventure in over 20 years. But from an LP point of view, has that changed how you diligence fund managers both on a net new investment landscape and then also from a follow on perspective.

On one hand no and on one hand yes. And the no part is we have used the same rubric for underwriting funds since day one and that has not changed. So people are probably bored of hearing me say this, but we underwrite series A risk to a 3x and anything earlier to a 5x and that has not changed. Doesn't matter what we're doing. Follow on initial whatever. I think, and this is what Charles was saying before is just very present to part of this is even if folks are new because we manage the CalSTRS emerging manager program, so we're specifically trying to do new folks and some folks do not have the experience set. But are they thinking and learning all the time? Because this market is fast and there's a vast amount to know and there's I think as you get older in the industry, a lot of people that I really respect realize they have to learn all the time. So it's not that it's different, it's just I'm more acute to listening for this. Are people really listening and learning about what they need to do and do it differently? Because I don't know what's coming down the road with AI tomorrow. And part of that's also the very present in the market today where there is clearly follow on funding preference to certain kinds of companies. And that's just one example. But just how much are people thinking and looking at what they're funding and just being aware that it's true versus kind of a denial of reality, which to me is a little bit of a red flag. It's fine with me if you say I don't know how this is going to work out, but here's what I'm watching, here's what I'm learning. I don't know how it's going to work out either, but just saying it's all going to be fine. And especially for folks that are not right in the sweet spot of AI funding land. And even that has kind of its own downsides. That to me, I think I'm more sensitive to as an LP personally when I'm talking to folks now, because I don't know if we've ever seen it slow down, but that doesn't feel true to me.

Well, certainly a very exciting time to be an lp. Thank you Beezer, for stopping in. Can't wait to feature more of your rating on the Learning Corner. It's always so wonderful when we see some stuff that you publish.

That's so kind of you to say. And you know I love chatting with you all. I learn from you every day.

Our next topic is titled why Tech and Media Is Complicated by OM Malik outlining why comms across tech, startups and venture have largely become echo chambers with with little of importance. Actually making it to print opens the problem on access journalism, and while that form of journalism has existed for years, it's emerging in new forms. So AI podcasts, short form interviews, and more. What he says is missing is contextual skepticism and rigorous questioning, but those certainly have no place in this access journalism market because they defeat the very purpose it was built upon. It feels like nearly every tech news outlet is focused more on velocity than bringing their audience's tangible information they can digest and walk away from knowing what the opinion was, or at least the largest takeaway. He hearkens back to the 90s, when tech journalists would publish nothing but hot startups and their latest financings, company concepts and the characters behind them, when it didn't matter if anything was true. The system being in motion was really the only thing that mattered. And he closed the piece with don't hate the player, play the game. Like I said, velocity trumps everything we've talked about, media cross venture in a couple different episodes and how there are clear games that media has to play in order to optimize on clicks, reshares subscribers. It makes me wonder, did it ever really matter when your company or product got featured in some media outlet? Or has it always truly felt more contrived?

Honestly, I think back to the early days of TechCrunch and I think about when Arrington was running TechCrunch. He had an opinion and he would sometimes, maybe at his own peril, be like, this is a dumb idea and it was a dangerous thing to do. Because you can imagine it's the first thing they teach you in media training is Never go on 60 minutes. Minutes or whatever the 60 minutes equivalent is in the modern era, because you don't know what they're. You don't know their angle. And there are a few I won't name. There are a few journalists in tech who I know a lot of comms people say, avoid this person literally because they ask hard questions. And if this person calls you, you should be like, really on your toes. Because the problem is if you do that, enough people stop talking to you. And if people stop talking to you, there, you know, there's a very clear counterpoint to this, which is bad blood. Read the book. There are no. None of the sources that you would normally want to go to would talk to this person. I think about the student writer at Stanford who took down the president. He didn't have great access. So I think part of the problem is the appetite for this stuff. Is there creating this, as Ohm said, like creating these artifacts, it's hard. And increasingly what I've found is a lot of the tech voices that I enjoy reading the most are independent. Eric Newcomers pay for his stuff. Casey Newton I pay for his stuff. It was interesting. The thing I enjoyed reading most about Molt book was Casey's piece. Yeah, Mostly because he expressed some level of skepticism that this is a good idea. There's two things I wish we had in tech journalism that are gone. One was people who were more interested in, like, what is this company? And almost a good point. You read some of these posts and the most salient thing you take away is that this company raised a lot of money from a really famous venture firm. You're like, what does the product do? Oh, it's an agentic AI harness. You're just like, but what is it like? What does that even mean? And I think sometimes the amount of money you've raised, the places where the company, the LinkedIn profile of the founders is what matters. And the substance of, like, what is this company building and why does it matter? Is lost. And I do think in a lot of ways, Cluly was some kind of hypothesis of this, because so many companies I talked to were like, did you see what Cooley did? I'm like, well, you couldn't miss it. They successfully broke through the noise floor, which is incredibly difficult to do. And everyone's like, we got to do what they do. I'm like, but guys, we don't actually know if breaking through the noise floor is going to translate it to a product service that people care about once they know about it. And we've seen this before. When the Dollar Shave Club video came out, everybody's like, we want to make one. I'm like, but most of you guys aren't funny and entertaining. Michael Dubit, it's not going to work for you in the same way. And also, we've seen it before. And so I think tech journalism in a lot of ways has turned into marketing. And not because I think the journalists themselves are markers, because I think companies and VC firms treat it as a marketing event. And the other thing that OM kind of alludes to, but I don't think he gives himself enough credit for. We don't have as many tech journalists who've been doing this long enough to really have sources. Natasha Mascarenas and Katie Roof. And there's like a handful of people. I'm missing other journalists who I really respect. But I think it takes time to build the relationships to have sources. And you have to be willing to say, the emperor has no clothes sometimes. And I'm not entirely sure where the audience is for that. And I also say, like, a lot of VC firms decided the solution was to go direct. And in many ways, we live in this world where there really isn't any, like, authoritative tech news public. Like, early on, TechCrunch was pretty authoritative. You had Venture Beat and you had some other. But, like, there were a handful of outlets. That's an authoritative place that is like the New York Times of tech. And now I don't think we really have that. We have a bunch of substacks and beehives and people who only post on Twitter and people who only. I look at somebody like our friend Peter Walker, he's pretty authoritative on the state of venture financing, maybe more authoritative than PitchBook. And he writes on LinkedIn. And so I just think we live in this weird media landscape where most of the companies being covered don't want tough questions and there's a plethora of friendly outlets. And to the extent that people have hard questions or skepticism, I only find it in group chats. I don't find it in public.

Just with access journalism and media today being so much of a self fulfilling flywheel, what is the adequate amount of time and effort placed on curating an image in different media outlets? If you're a founder, like, is it zero? Is it the classic VC term? It depends. What do you think?

I had a very funny lunch conversation with, with one of our colleagues, not at our firm, a different firm. And I was at their office and this person was complaining that the CEO of their company spends too much time in front of the camera. And this person was at Davos. And I was like, yeah, but we're watching him at Davos right now in your office while you're complaining. We're like watching this person in, in Davos again. I think most people, if you're not inventory, you don't spend all day thinking about tech. Most people are thinking about their children, their families, other things. And I do think you can break through. I, I do think in some ways, for a lot of people, if you said what is AI? They'd be like, well, chatgpt equals AI. And you're like, wow. Well, because OpenAI is like the most visible company. It's the thing that most people associate and they probably never heard. A lot of people never heard of Claude. Maybe they've heard of Gemini. And I think that's partially because OpenAI is so closely linked with the category. They have AI in their name, for goodness sake. And I think there's just a lot of value in being visible. You look at Elon Musk, he, he impacts his companies by being visible. I think in, in ways positive and potentially negative. And I think this, I think this stuff matters, but only if there's substance behind it. And I worry there are some founders who chase the objective without having any substance to put behind it.

Like early stage founders wanting to announce, precede or seed. How much time would you want to place on that? And chasing around a reporter to do that.

I mean it's funny, I tell them like it's great to have public links out there. When people look for your company, I don't think it does what it used. It used to be like a real moment. You'd get like a big pop. There'd be a lot of attention paid to you. My sense is that that doesn't happen anymore because tech attention is so much more fragmented. Which is why I think you've seen more companies do the like soft focus LinkedIn funding announcement, launch video. I'm sure there'll be a we're going to go the other way. It's going to be jiggly iPhone video. Hey, I'm on my way to the office. Yeah, gone through all of these different phases. Somebody will riff. We had the concert poster style fundraising announcements. Those were novel for a while. I think people's desire to break through the noise will constantly cause them to try new experiments. Don't know that any of them will work, but I expect people to continue to try.

Well, our last piece is an essay by Michael Dempsey titled VC Backed Startups are Low Status From a substack on my mind. The core argument is that venture backed startups have undergone the same status collapse that investment banking experienced in the 2010s. They've become the default path for ambitious people, which paradoxically makes them unremarkable. Large see firms now operate like investment banks, deploying billions into consensus ideas, while founders optimize for legibility rather than genuine conviction. This creates what we talked about earlier, a doom loop where institutions fund only what makes sense in partner meetings and founders build really only what's fundable and then the founder identity itself, once implying contrarian vision and real risk, has completely faded. Unlike Finance's clear 2008 crisis moment, tech faces something a little bit more insidious. Cultural exhaustion from a diffuse of m of goodwill erosion, dehumanized investor relationships, political vilification. Dempsey argues that we're at an inflection point where vibes have become the competitive advantage. Talking through the differences between anthropic and OpenAI and how that attracts and deflects talent. And the path forward, from his perspective, is pretty murky. Founders will maximize extraction while they can, capital selection will become an identity statement, and some will abandon the VC model entirely as AI reduces capital requirements. And the uncomfortable reality is that talented people are almost frozen between knowing the current system is broken and not yet seeing what replaces it. Gen Z has only known the startup mill. Millennials kind of built this machine and will mostly extract value quietly. And then Gen Alpha possibly might reject the entire thing without guilt or nostalgia at all. It's hard because we both live in bubbles, where it does feel like becoming a founder is still very much celebrated. But I do see the future of what Michael is predicting coming to life. So, wanted to pause for your thoughts on this.

I think he's spot on and I think it's hard to remember, but like once a time, what's about time? Like when investment banking was a boutique business, it was hard to get into. The banks themselves were not publicly traded. They were private partnerships. And I think you can't scale prestige. And I think part of what made those careers prestigious is the jobs were hard to get and the industry was small. Sounds a lot like venture. Private equity, I think went through the same thing. There was a period of time where private equity was this small cottage industry and people made a lot of money and it was hard to get into. And then private equity scaled. And it's not that it became unprestegious, but it's like, oh, you're another banker who worked at Goldman who now works in pe. Shocking. I think in some ways venture and venture backed startups are going through the same things as we industrialize the venture business. The venture used to be a small business. There used to not be that many VCs. Again, it was small, people made a lot of money, it was elite, it was hard to get into. And now it doesn't have all of those features. Largely because as an industry we have attempted to industrialize and scale the model. And now, you know, venture firms look like a lot more like other private asset managers than they do like something different. And venture backed startups have become kind of industrialized. We crank them out on a regular basis. We have these playbooks. It's not remarkable to meet somebody. I remember the first time I met somebody who was like, I'm quitting my job to go into crypto. I'm like, have you lost your mind? That at the time felt like a very risky, crazy thing to do. I still think it's kind of risky and crazy to me, like right now there isn't an equivalent. And I think what, what makes these things important is there's very little perceived risk with joining a venture backed startup today. Twenty years ago, if you were like, hey, I have an MBA from Stanford or Michigan or Harvard, and instead of going to consulting or banking I'm going to go to a startup. People would have been like, that's crazy. Why would you do that? You're going to make no money. Also there was a real sacrifice. You didn't make any money and there was a chance your equity would be worth nothing and you still had student loan payments to make. And now like going to a venture backed startup just for the part isn't that risky.

And especially if you're a younger generation, maybe the worst case scenario is that, I don't know, you go to a startup, doesn't do well. But you got to say that you were part of it.

Yeah.

During the second life you were there. And that's my last question. Do you believe in Michael's statement that Vibes will essentially become the competitive advantage? And I'm thinking specifically about younger generations when they think about roles to take, especially joining VC backed startups.

I think if you're part of the nihilism, like nothing matters, none of this is real, none of it's serious. And Vibes is the only thing. Thing I do think you do have some very stark contrast between the public perception of anthropic versus the public perception of OpenAI. They feel like different companies. And I, I've never worked at either company, so I couldn't tell you culturally what it feels like. But we had like Google and Yahoo back in the day. Sometimes with these companies that are doing the same thing but have different culture and I, I do think people are going to say, where do I feel like I fit in? And if you think about is my friend, whose zip up do you want to wear on the bus and what judgments are people going to make about you as a person based on the company's name on the sleeve of your zip up jacket in San Francisco? And I do think people care about that because I think these, they want to be affiliated with brands. And I think there are cool brands and there are uncool brands and I think there are cool startup brands and uncool startup brands and I think a lot of people are like, I want to be associated with the cool brand.

And we're still in a place where I think if you get to make the decision between wearing an open AI hoodie or an anthropic one, I think you're in a good thought.

Yeah. Right. Life's working out for you.

Well, we're all out of time. Thank you, Charles for jumping in. Thank you to our listeners for jumping in as well. We'll talk with you all next week. Please share with your friends in the meantime. Thank you.

Bye.