LPs to VCs: Show me the money

Limited partners are demanding more facetime from VCs. How much do LPs really care about returns?

Everybody’s taking a hard look at the P & L these days, and that includes the limited partners who fund VC firms, according to a panel of general partners and consultants at the Dow Jones Limited Partner Summit West event last week.

The panelists said LPs--the pension funds, endowments, and other investment firms that keep money flowing to venture capital firms--are hammering their VCs for more data on portfolio companies.

That’s good news—and probably should have happened a long time ago. The finder’s fee scandal currently rocking the CalPERS, which at $200 billion clocks in as one of the biggest LPs in the business is another indication of how our public money has been invested poorly in recent years. Matt Marshall’s expose on Oak Investment partners from April outlines another instance of personal connections trumping returns as an LP investment criteria. All of this hurts the public coffers, which , especially in California, are already supping on a bounteous plate of hurt.

It’s a bit unnerving, though, that the story of LP’s increased scrutiny didn’t contain a single LP representative. Sure, they’re notoriously tight-lipped, but one would imagine that a public show of stepped-up due diligence would be in order. I suppose they’re too busy cleaning up the pay-to-play scandal to spend time defending investments in the relatively small VC asset class.

Besides, many of the discussions around VC returns, it seems to me, miss a crucial point. LPs manage huge diversified portfolios that have an interest in national and global stability. Isn’t it possible that the venture capital asset class constitutes a strategic investment? I’m thinking especially of greentech, but this also applies to enterprise IT, internet, cybersecurity…. While five and ten-year returns matter to LPs, perhaps they’re willing to take a hit on these, as long as greentech helps take down terrorist oil money, the Internet spawns thousands of small businesses, the valley trains engineers who can shore up our national defense online, etc. Granted, we all need to look at the bottom line, but perhaps a GP’s bottom line isn’t exactly the same as an LP’s.