2020.06.21
When to use our platforms & VC's capacity constraints & aligning LP-GP incentives
I’ve been asked a few times who my audience is. Ultimately, I do write for myself. The time spent re-working sentences and paragraphs and entire posts helps me crystallize my thoughts and beliefs. However, I don’t want to write only for myself—if I can provide an investing perspective that’s helpful to others, then it’s my duty to share it.
This past month, there wasn’t a perspective I could share that would add to the discourse. Any attention whatsoever paid by my audience to LP-GP minutiae would take too much attention away from thinking about police brutality and systemic racism. Stepping back seemed right.
I believe those with platforms have to consider whether their voice needs to be heard at that moment. And if their voice doesn’t add to the discourse, then they should choose to step back and allow more important ones to be heard. Maybe this makes me a hypocrite—I’ve participated in panels that were entirely white and male, whose perspectives are too easy to find. But, if I don’t start now, then when?
The past two weeks I’ve been thinking a lot about Reggie James’ post, The Myth Of Blackness In Venture.
It wasn’t until reading it and listening to Kanyi Maqubela’s episode on the Notation Capital podcast that I realized how many of my reference checks on GPs were with other GPs.
“I’m surprised to the extent in which LP’s relied on other GP’s. For context, for perspective, for reputation. And in retrospect it makes sense. Because it’s an access controlled industry. It’s a capacity constrained industry…”
Aside from other LPs, GPs are the most accessible nodes within the networks of LPs. Founders, CEOs, and other connections are likely outside the networks of most LPs—and when an LP has to triage their time and opportunities, they’re going to head to the nodes they already know and trust. And, if an LP doesn’t recognize the biases those references have and doesn’t choose to turn over every stone in sourcing new opportunities, then the industry will continue to be capacity-constrained.
Reggie’s commentary on Andreessen Horowitz’s Talent x Opportunity Fund (TxO) also resonates.
I have always said that to really change things, Black founders need to return the fund.
However, carve-out vehicles and charity funds, remove us from direct relationship to the performance of fund managers.
LPs entrust their capital to GPs, and in turn, they’re incentivized with carried interest. This aligns their outcomes with ours—the GPs are only generating life-changing wealth if the LPs are profiting as well. This financial motivation underpins the LP-GP relationship because it works.
Much more so than boilerplate public statements, programs like TxO could be really powerful opportunities for GPs to align both theirs and their LPs’ performance with the outcomes of underrepresented entrepreneurs. That’s why Andreessen Horowitz needs to invest in TxO from their early-stage fund, rather than through a donor-advised fund as it’s currently structured. Even though donor-advised funds allow their donors to be involved in how their donations are invested, these donations are charitable, tax-deductible gifts. The financial success of Andreessen Horowitz, and their LPs subsequently, will not be affected by TxO’s outcome.
If Andreessen Horowitz invests in TxO from their early-stage fund it would show the entire ecosystem, and their LPs, they believe that investing in the program’s participants can generate fund-returning outcomes. Otherwise, the incentives will be misaligned, and neither Andreessen Horowitz nor their LPs will be invested in TxO’s outcome in a way similar to their other carried interest-generating funds. Align the incentives, and make the outcome really matter.
Enjoy the rest of Father’s Day weekend. Here’s what I’ve had playing on repeat today.