Fireside Chat, Interview, Roundtable
Sheel Mohnot: VC Funds Are TOO BIG
- The venture capital industry is currently in a "prisoner's dilemma" where increasing fund sizes force the sector to generate returns at unsustainable valuations, whereas smaller funds would likely operate at lower entry prices and yield better collective outcomes.
- There is a noted contradiction among investors who historically rejected Saudi capital, which many now accept following the onset of a recession, described by the speaker as "hypocrisy."
- Some large funds have shifted focus from returns to management fees due to their excessive size, while "returns-focused" funds like Founders Fund are reducing capital commitments (e.g., down to $900M) to maintain discipline.
- While funds have reduced in size, the speaker does not expect a significant wave of funds being "given back" (returned to LPs) in the current cycle, noting that such events have largely already occurred in the past.
- BTV's latest fund structure consists of a $150 million seed fund and a $75 million opportunity fund, an increase from the previous $75 million seed size driven by the need to support follow-on strategies.
- The expansion of fund size was necessitated because portfolio companies raised follow-on rounds rapidly after initial investment; a strategy of leading only a single check would force the fund to follow on into weaker companies simply because stronger companies could raise capital elsewhere.
- Follow-on investment is inherently difficult because it assumes early ability to predict winners; the speaker notes that initial "winners" often struggle, while slow-burners eventually reveal themselves as the actual long-term successes.
- Investors rarely explicitly tell founders they will not receive follow-on funding, as doing so might "burst the bubble" of founder confidence needed to pivot or recover.
- BTV invested in a Southeast Asian fintech company based on a thesis of market expansion that failed to materialize; the fund now faces a binary choice where the company must pivot to a different customer segment to justify further support.
- A specific recent investment saw a portfolio company raise a new round at a $100 million valuation from Andreessen after BTV provided additional capital, validating the necessity of the follow-on strategy for companies that were performing well but not yet attractive to new lead investors.