Distributions back to LPs dried up. LPs slowed down their fund investments. VCs had to slow down. The cycle feeds itself.
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Rich:
Let's keep swimming upstream and talk about how this impacts the LP side of the business. LPs, limited partners, those are the folks that give the venture funds money. Fund distributions dried up. Distributions in 2023 were down 64% compared to the long-term trend line from 2010 to 2020. Think about it this way, investors in venture funds that are used to getting back, say a dollar. Are now getting back 33 cents and being told,"the other 67 cents is coming your way eventually." Imagine if you were expecting to get a dollar and you got 33 cents instead? What are you going to say to that person? What you're going to say is, if you're slowing down on your distributions, I'm slowing down on my distributions." And so LPs then have slowed down. And you can see this with the years between closings for venture funds. During the 2021 madness, we're hearing of some funds that we're raising and deploying capital in 12 months. And to any gen extras out there such as myself, you will remember the.com boom. That pace of investing in 2021 is awfully a lot like 1999 era. What happens when the LP slowdown? then the GPs, the investors, have to slow down. Aumni estimates that the from velocity has been cut by more than half. This is the average number of investments that a venture capital fund participates in per quarter. At the peak, it was 4.6 investments per quarter. And it's down to 2.1. Add all of this up. You have more Steed funds than ever before. Series A is spolied for choice. Series A raises the bar. Startups spend more time in the Seed phase. Startups come back to investors for inside rounds. VC's shift allocation from new checks to follow on checks. There's less capital available for new checks. Some venture funds are shutting down. There's less capital available overall. Meanwhile, cash on cash returns, dry up LP, slowed down their pace. So VCs slow down their pace. So startup funding slows down again. Resulting in startups, spending more time in the seed phase, coming back to their investors. Investors are allocating even more money for follow-ons making even less money available for new checks. And on, and on, the cycle goes. This is the seed crust.