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Where Is the "Funders Fund" for Venture Capital?

Venture capitalists here in Silicon Valley are feeling pretty good. Returns are starting to trend up. High-profile exits are common. Fundraising for general partners is getting easier. There’s even a rush of new VCs looking to launch first-time funds. And while I’d normally be happy to see new entrants — new funds often mean new models — I’m not happy. Too many of these new VCs are "me-too" players; looking to replicate the best-of-breed VCs in the Valley rather than trying things that are fundamentally new.

And that’s actually quite problematic. Why? The last thing this industry needs is a new crop of the same thing. The high-profile exits that we're all supposed to be cheering haven’t generally translated into better risk-adjusted returns for LPs. As of June 2014 the VC industry has managed to eke out a whopping 18 basis points of “value add” over the Russell 2000 — over the past ten years! Are those 18 bps worth the fees, lockups and illiquidity of VC? Nope. In fact, most LPs want 400 to 600 bps over public market comps, per year, to justify venture capital as an asset class. So it’s remarkable to see VCs bragging about anything right now.

The traditional models of venture capital continue to fail the broad community of investors. To be fair, over the past decade new models have been launched to try to better align the interests of the VCs with the entrepreneurs; let’s call this VC 2.0 (see Founders Fund, A16Z, ffVC, and so on), but these models haven't yet addressed the needs and interests of the broader investment community (i.e. the funders or LPs). And this raises an important question: What should VC 3.0 look like? In my view, VC 3.0 is about connecting the funders with the founders in the most streamlined, cost-effective mechanism available. Only when we can do that will the promise of Silicon Valley riches be realized for the broad community of LPs in venture funds.

Ironically, VCs will tell you that any industry with unhappy customers and highly profitable incumbents is ripe for disruption. It’s time for VCs to look in the mirror.

But before I discuss ways in which LPs might catalyze real creative destruction in the VC ecosystem, let’s start by flagging up the key problems I see in this asset class today:

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