The Twenty Minute VCBeezer Clarkson: Are LPs Open for Business & Why Do LP Incentive Mechanisms Need to Change? | E1073
At a glance
WHAT IT’S REALLY ABOUT
LPs Rethink Venture: Power Laws, Liquidity Crunch, and Misaligned Incentives
- Beezer Clarkson, who leads Sapphire Partners, discusses how LPs are navigating today’s tougher venture environment, emphasizing the centrality of power-law outcomes and the difficulty of achieving outperformance without true fund-returners. She explains why LPs are slowing commitments, dealing with liquidity pressures, and re-evaluating fund sizes, pacing, and relationships with GPs after the 2020–2022 boom. The conversation digs into structural misalignments—like TVPI-based compensation, oversized management fees, stapled opportunity funds, and early secondaries for DPI—that shape GP and LP behavior. Clarkson also highlights where LP demand is shifting (toward “Goldilocks” mid-sized funds), how emerging managers graduate or fail, and why incentive mechanisms and transparency need to evolve.
IDEAS WORTH REMEMBERING
5 ideasOutperformance in early-stage venture is power-law driven, not by base hits.
Clarkson notes they have yet to see a 3x+ early-stage fund without at least one company returning roughly a full fund; a portfolio of 2–3x outcomes alone rarely drives true outperformance.
LPs are still investing, but with far stricter selectivity and slower pacing.
Many LPs pulled forward future commitments during the 12–18 month fund cycles of the boom; with IPO and exit markets constrained and other asset classes also illiquid, they’re now tightening budgets and stretching venture deployment back to ~3-year cycles.
The new center of gravity is mid-sized ‘Goldilocks’ funds, not mega or micro.
LPs increasingly want $300–$700M early-stage funds where they can write $20–25M checks, get meaningful ownership, and avoid both the return-dilution of multi‑billion funds and the underwriting risk and DPI scarcity of sub‑$100M micro funds.
Fund economics and incentive mechanisms create major GP–LP misalignments.
Structures like 3-and-30 fees, large stacked vehicles, and LP organizations compensated on TVPI rather than DPI can encourage asset gathering, rich paper marks, and reluctance to realize or right-size valuations, even when it’s against LPs’ long-term interests.
Valuations and marks are highly inconsistent, and LPs often haircut them internally.
Clarkson describes wide dispersion in how managers mark similar assets, plus situations where companies drop from multi-billion marks to a fraction; sophisticated LPs routinely discount manager marks by 20–25% to manage the looming TVPI–DPI gap.
WORDS WORTH SAVING
5 quotesWe’ve yet to see a fund that’s returned three or more X that doesn’t have a company that’s returned at least one time the fund.
— Beezer Clarkson
LPs are not in the same business of risk-taking the way that GPs are. You’re trying to preserve capital at some level.
— Beezer Clarkson
If you’re not taking a big swing for the fence in early stage, you’re probably not going to get the long-term performance.
— Beezer Clarkson
It is incredibly hard to be an early-stage fund that has outperformance without a couple fund returners.
— Beezer Clarkson
Some LPs get paid on DPI, some get paid on TVPI… The way portfolios are held is relevant to how they are viewed, not just for their personal paycheck.
— Beezer Clarkson
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