Fireside Chat, Interview
Roger Ehrenberg: Why VC Returns Will Get Worse & Why LP Incentive Structures are so Broken | E1117
- Early-stage ventures (incubation, pre-seed, seed) will remain distinct, while mid and late-stage segments will evolve toward institutional asset management characteristics.
- The industry will undergo a "barbelling" trend where venture capital is not commoditized, yet very early artisanal VC remains non-scalable, limiting LP access to top-tier early-stage firms.
- Fee structures for the 2 and 20 model face imminent pressure similar to hedge funds, though best-in-class firms are expected to charge premiums justified by after-fee outperformance.
- Large asset gatherers will sustain high capital supply levels with no anticipated retreat, driven by durable capital allocation from sovereigns and large wealth accumulators rather than cyclical corporate LPs.
- Mid and late-stage markets are predicted to face the greatest disruption from new LP classes demanding fair fees and returns, contrasting with endowment structures focused on relationships and mission rather than pure profit maximization.
- Portfolio construction may shift toward less volatile strategies targeting 12 to 15 percent returns via institutional mid-to-late-stage managers, though achieving Yale-model compounding is deemed unlikely for 20-40% illiquid allocations due to saturation.
- The IPO market is expected to show initial recovery signs in 2025, with a full market return anticipated in 2026.
- A Trump victory is predicted to open the M&A environment through a shift in FTC leadership away from aggressive antitrust enforcement, whereas small M&A activity currently prevents capital recycling.
- NFL teams are expected to become PE investable, driving upward prices alongside downward return expectations.
- Continuation funds are forecast to become a pragmatic liquidity solution for managers with stacked funds and impatient LPs, while firms failing to deliver DPI will eventually fade without becoming targets for such strategies.
- Investment focus will target promising early and mid-stage firms that missed the 2016 to 2020 IPO wave due to unfortunate timing, acknowledging that top founders now rely on VCs primarily for psychological support and sounding board functions.
- Future portfolio management will face heightened difficulty in selection compared to the 1990s, with 90% of VCs potentially detracting value without proactive humility.
- Long-term personal commitments include a shift to a chairperson role in 10 years, with sons aged 36 and 33 serving as principal operators, while continuing investments in affordable workforce housing, Detroit, and food and beverage sectors.