Beezer Clarkson: Are LPs Open for Business & Why Do LP Incentive Mechanisms Need to Change? | E1073
Beezer Clarkson (guest), Harry Stebbings (host), Narrator
In this episode of The Twenty Minute VC, featuring Beezer Clarkson and Harry Stebbings, Beezer Clarkson: Are LPs Open for Business & Why Do LP Incentive Mechanisms Need to Change? | E1073 explores 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.
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.
Key Takeaways
Outperformance 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.
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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.
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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.
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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.
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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.
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Manager survival from Fund I to Fund IV is rare and depends on both performance and team stability.
Looking at data since 1995, roughly half of Fund I managers never raise Fund II, and only about 17% make it from Fund I to Fund IV, reflecting early breakage, strategy drift, and partnership/succession challenges.
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LPs increasingly expect thoughtful fund sizing, pacing, and distribution decisions.
Clarkson says LPs are now more likely to question rapid deployment, oversized fund growth, stapled opportunity funds, and reluctance to take secondaries or distribute when public windows are open, using DPI consistency and fiduciary behavior as core evaluation lenses.
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Notable Quotes
“We’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
Questions Answered in This Episode
How should LPs redesign their own compensation and evaluation systems to prioritize DPI and true realized performance over paper marks?
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. ...
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In a world of longer exit timelines and a wide TVPI–DPI gap, what’s the ‘right’ balance between selling early for DPI and holding winners for maximum upside?
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Given the data on manager breakage between Fund I and Fund IV, what specific signals should founders and LPs watch to identify which emerging managers will endure?
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How can smaller or emerging funds structure fees, GP commits, and pacing so they’re both economically sustainable and aligned with LP expectations?
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Will the rise of AI and other platform shifts fundamentally change power-law dynamics in venture—or simply create a new, smaller set of mega‑winners that reinforce them?
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Transcript Preview
There is a class of LPs that need to write very large checks. Those are vehicles that work for that fund size.
Mm-hmm.
Sometimes other folks forget that LPs are not in the same business of risk-taking the way that GPs are. You're trying to preserve capital at some level, for all the various reasons. There is a logic to if you need to write $100 or $150 million check and you want some alpha, but you don't wanna risk losing it.
(music) Pisa, I am so excited for this. Thank you so much for joining me today.
Thank you so much for having me. It's awesome to be in your new office.
Isn't it nice doing it in person? This is so much nicer than Riverside or any online platform. And I, I wanna start about just baseline, as blunt as I can be, like who are you and what do you do?
Well, I'm Pisa. (laughs)
(laughs) Lovely to meet.
Yeah, lovely to meet, you know, many years after first meeting. So I manage Sapphire Partners, which is the LP strategy of Sapphire, and we invest in early-stage venture funds, US, Europe and Israel. And that's what I do.
Okay. So you've been an LP for many, many years and you have the chance now to call yourself up the night before your first day as an LP. Knowing what you do now, what would you advise yourself?
I would say really understand the importance of the power law, which I know sounds like a bit of a nitty-gritty. And I'd gotten this advice from other LPs, which is the difference of having a power-law defining company in your portfolio and the experience of that for the GP along with the entrepreneur really changes the understanding of how a venture works. And you really just can't... Or maybe you can and we just haven't seen a fund that's sort of un- in the early stage, onesie, twosies it to outperformance. It's hard to walk that until you really feel it. And then you see these activities, you see the companies taking off, you see the difference in what it looks like to have that kind of a power driver in your portfolio.
I have so many things to unpack from such a small segment, uh, this will be a short show.
(laughs)
Uh, onesies and twosies it to outperformance. What do you mean by that?
Well, some, it... If you think of a growth-stage portfolio, it's not that one doesn't wanna have a power-law company and have it return 100X and be two to three times your p- your fund. It's just much harder when you have a large fund, so a lot of those funds end up having a number of exits that then end up adding up to driving performance. In a early-stage fund, if you... We've yet to see a fund that's returned three or more X that does not have a company that's returned at least one time in the fund. And that's what I mean by, like, you can't do the single and base hits, like, "Oh, I got a 2X on this deal, I got a 3X on that deal." Those are all great to add to the portfolio, but if you don't have a fund returner or a couple half-fund returners, it's, we haven't seen a fund that's hit outperformance.
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