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jhylau | on: Ilya Sutskever's SSI Inc raises $1B
VCs at the big/mega funds make most of their money from fees, they don't actually care as much about the potential portfolio investment exits 10-15 years from now. What they care MOST about is the ability to raise another fund in 2-3 years, so they can milk more fees from LPs. i.e. 2% fee PER YEAR on a 5bn fund is a lot of guaranteed risk-free money.

To be able to achieve that is entirely dependent on two things:

1) deploying capital in the current fund on 'sexy' ideas so they can tell LPs they are doing their job

2) paper markups, which they will get, since Ilya will most definitely be able to raise another round or two at a higher valuation. even if it eventually goes bust or gets sold at cost.

With 1) and 2), they can go back to their existing fund LPs and raise more money for their next fund and milk more fees. Getting exits and carry is just the cherry on top for these megafund VCs.

rawrawrawrr | parent | next
Are you a VC? If they really didn't care about their investment exits, that would be crazy.
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andsoitis | parent | next
> about is the ability to raise another fund in 2-3 years, so they can milk more fees from LPs. i.e. 2% fee PER YEAR on a 5bn fund is a lot of guaranteed risk-free money.

You will struggle to raise funds if the companies you bet on perform poorly; the worse your track record the less chances of raising money and earn income from it.

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baxtr | parent | next
I’m not a VC, but I doubt that’s true. You can exactly raise one fund if you operate like that but not two or three.
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lazzlazzlazz | parent | next
This couldn't be less true, for what it's worth. VCs from the largest funds are in it ~entirely for the DPI (distributed to paid-in capital; investment returns). Not only is this far, far more profitable than management fees (which are mostly spent on operations) — DPI is the only way to guarantee you can raise the next fund.
hello0904 | parent | next
So the question I have is, who are these LP's and why are they demanding funds go into "sexy" ideas?

I mean it probably depends on the LP and what is their vision. Not all apples are red, come in many varieties and some for cider others for pies. Am I wrong?

neom | root | parent | next
The person you're responding to has a very sharp view of the profession. imo it's more nuanced, but not very complicated. In Capitalism, capital flows, that's how it works, capital should be deployed. Larges pools of capital are typically put to work (this in itself is nuanced). The "put to work" is various types of deployment of the capital. The simplest way to look at this is risk. Lets take pension funds because we know they invest in VC firms as LPs. Here* you can find an example of the breakdown of the investments made by this very large pension fund. You'll note most of it is very boring, and the positions held related to venture are tiny, they would need a crazy outsized swing from a VC firm to move any needles. Given all that, it traditionally* has made no sense to bet "down there" (early stage) - mostly because the expertise are not there, and they don't have the time to learn tech/product. Fee's are the cost of capital deployment at the early stages, and from what I've been told talking to folks who work at pension funds, they're happy to see VCs take swing.

but.. it really depends heavily on the LP base of the firm, and what the firm raised it's fund on, it's incredibly difficult to generalize. The funds I'm involved around as an LP... in my opinion they can get as "sexy" as they like because I buy their thesis, then it's just: get the capital deployed!!!!

Most of this is all a standard deviation game, not much more than that.

https://www.otpp.com/en-ca/investments/our-advantage/our-per... https://www.hellokoru.com/

galahad_ | root | parent
I can't understand one thing: why are pension funds so fond of risky capital investments? What's the problem with allocating that money into shares of a bunch of old, stable companies and getting a small but steady income? I can understand if a few people with lots of disposable money are looking for some suspense and thrills, using venture capital like others use a casino. But what's the point for pension funds, which face significant problems if they lose the managed money in a risky venture?
neom | root | parent
A better way to look at it is: if pension funds are not fond of risky investments, then what am I seeing?
jhylau | root | parent
These LPs at mega funds are typically partners/associates at pension funds or endowments that can write the 8-9figure checks. They are not super sophisticated and they typically do not stay at their jobs long enough to see the cash on cash returns 15 years later. Nor are they incentivized to care either. These guys are salaried employees with MBAs and get annual bonuses based on IRR (paper gains). Hence the priority is generating IRR , which in this case is very likely as Ilya will raise a few more rounds. Of course, Lps are getting smarter and are increasingly making more demands. But there is just so much capital to allocate for these mega funds, inevitable that some ideas are half baked.
isoprophlex | parent
I didn't know what an LP is, having lived life gloriously isolated from the VC gospel...

an LP is a "limited partner." they're the suckers (or institutional investors, endowments, pensions, rich folks, etc.) that give their cash to venture capital (VC) firms to manage. LPs invest in VC funds but don't have control over how the money gets used—hence *limited* partner. they just hope the VCs aren't burning it on overpriced kombucha and shitty "web3" startups.

meanwhile, the VCs rake in their fat management fees (like the 2% mentioned) and also get a cut of any profits (carry). VCs are more concerned with looking busy and keeping those sweet fees rolling in than actually giving a fuck about long-term exits.

Someone wants to fund my snide, cynical AI HN comment explainer startup? We are too cool for long term plans, but we use AI.