Interview
Oren Zeev: 50% of Funds Will Go Out of Business & Why GPs Shouldn't Tell LPs Their Strategy
- The market is expected to eventually differentiate between software incumbents negatively impacted by AI and those positively impacted, with some currently discounted companies appearing expensive in hindsight while others face high valuations due to realized disruption risks.
- Certain businesses will be deemed immune to AI disruption due to operational complexity and deep data integration moats, whereas others will fail to adapt due to objective constraints or poor executive execution.
- AI is predicted to automate nearly all customer support functions, leading to dramatically improved gross margins, while simultaneously creating labor displacement concerns that Oren Ziv hopes will be proven wrong.
- Investment activity for companies growing from one to five million in revenue is insufficient to attract large fund interest in B or C rounds, though a specific company growing at 100% with healthy economics may sustain doubling growth for several years.
- Business models relying solely on growth without healthy economics face risks of unsustainable practices like circular deals, though rare scenarios exist where rapid growth despite unhealthy margins is necessary to secure market share.
- The venture capital industry is expected to bifurcate into very large platform funds and small boutique solo funds, causing the "messy middle" to suffer and leaving at least 50% of funds unable to raise capital in the near future.
- Fund sizes from 2021 invested at market peaks are not expected to perform poorly but will not be great, whereas a specific over $500 million fund from that period is predicted to perform well, while the 2024 fund is expected to be less than $250 million to facilitate superior returns.
- Liquidity from major IPOs is anticipated to create a tsunami of capital in 2026 or 2027, shifting the current lack of liquidity towards a disproportionate focus on DPI by LPs compared to three years ago.
- Secondary buyers are unlikely to pay unless they believe they can double or triple investments within two to three years, while managers may justify selling positions for DPI to demonstrate capital deployment for subsequent fundraising.
- Management fees adjusted for time value of money often generate more present value than carried interest for large funds, though individual partners in large partnerships may prioritize personal career success over long-term fund value.
- Founders are advised that second-round investments require substantial risk reduction rather than product-market fit optics, and those taking large preemptive rounds should maintain their behavior as if they lack capital to preserve focus.
- The speaker confirms a limit of 20% capital concentration in a single company to avoid discomfort, maintains ownership in current holdings rather than selling secondaries, and is the largest LP in every fund, contributing approximately 13-14% of the capital.
- Specific portfolio outcomes include Navan being a 100% certain AI beneficiary with no disruption risk, while a prop-tech company was incorrectly assessed as resilient against 2021-2022 interest rate rises, leading to a realization that overly aggressive stress testing could have prevented losses.
- AI represents the most significant historical change in humanity with immense value creation potential, yet past investment opportunities in Deal, OpenAI, and Anthropic were missed due to timing, and an attempt to acquire Audible privately failed to secure partnership approval.
- Most founders are expected to be receptive to non-judgmental investor support, though the industry must overcome the fallacy that deal visibility guarantees the ability to close, and specific ownership increases in profitable AI companies like Descartes may be limited by capital needs.