20VC: 50% of Funds Will Go Out of Business | Why Growth Expectations...

Full Title

20VC: 50% of Funds Will Go Out of Business | Why Growth Expectations Today are BS and Will Not Last | Why Oren Zeev Takes $0 Management Fees But 30% Carry | Why GPs Should Not Tell LPs Their Strategy

Summary

Oren Zeev, a prominent solo capitalist, discusses his investment philosophy with Harry Stebbings, emphasizing authenticity, contrarian thinking, and avoiding crowded markets. He addresses the evolving landscape of venture capital, the impact of AI, and the importance of sustainable growth over pure topline numbers, while also detailing his unique fee structure and alignment with LPs.

Key Points

• Great investment outcomes often arise from contrarian thinking, where ideas appear "weird or wrong" to the market, offering a competitive moat.
• The increasing level of competition in every sector necessitates avoiding crowded spaces to become a market leader.
• AI is fundamentally changing industries, creating opportunities and challenges; companies must be beneficiaries or adaptable to survive.
• SaaS multiples have decreased due to justifiable fears of AI disruption, but not all incumbents are equally vulnerable; operational complexity and distribution matter.
• Focusing solely on growth without considering sustainability and healthy economics can lead to unsustainable practices and eventual implosion.
• In venture capital, investing based on conviction rather than market sentiment or social proof is crucial, as one large win can outweigh multiple smaller losses.
• GPs should not be afraid to pivot their strategy when new information arises, as being a "self-validation machine" hinders good decision-making.
• Concentrated bets on conviction opportunities are preferred over broad diversification, as a single outlier success can significantly impact fund returns.
• The venture capital landscape is bifurcating into large platform funds and specialized boutique firms, with the middle ground facing increasing difficulty.
• A significant percentage of venture funds may struggle to raise future capital due to a shift in LP focus towards proven platforms and verifiable DPI (Distributions to Paid-In Capital).
• True alignment between GPs and LPs is achieved through radical transparency and shared incentives, exemplified by Zeev's zero management fee and reinvestment strategy.
• The current market, while presenting challenges in liquidity and valuation, is also an exciting time for investors due to transformative AI advancements.
• The most memorable founder meetings involve genuine passion, demonstrated resilience in addressing concerns, and a clear vision for the business.

Conclusion

Venture capital faces a significant consolidation, with many funds likely to fail unless they offer unique value propositions.

True alignment between General Partners (GPs) and Limited Partners (LPs) is paramount, often achieved through radical transparency and shared financial incentives.

The ongoing AI revolution presents unprecedented opportunities for innovation and value creation, making it a pivotal time for investors.

Discussion Topics

• How can emerging fund managers differentiate themselves in an increasingly bifurcated venture capital landscape?
• What are the ethical considerations for GPs when their personal incentives might diverge from the long-term best interests of their LPs?
• With AI's transformative potential, what are the most significant new business models or market opportunities you foresee emerging in the next 3-5 years?

Key Terms

AUM

Assets Under Management, the total market value of investments that a person or entity manages on behalf of clients.

Carry

Short for carried interest, it's a share of the profits that the general partners of a private equity or hedge fund receive from their investments.

Contrarian

An investor who goes against prevailing market trends, believing that the majority is often wrong.

DPI

Distributions to Paid-In Capital, a key metric for LPs to assess a fund's performance, showing how much cash has been returned to investors relative to their committed capital.

GP

General Partner, the firm or individual managing a private equity fund, making investment decisions and holding ultimate responsibility.

Incumbents

Established companies in a particular market or industry.

LP

Limited Partner, an investor who contributes capital to a fund but does not participate in day-to-day operations or decision-making.

Meritocracy

A system where advancement is based on individual ability or achievement.

Preemptive Rounds

Fundraising rounds that occur before a company has necessarily reached traditional milestones or valuation metrics, often driven by market opportunity or competitive investor interest.

SAFE

Simple Agreement for Future Equity, a convertible security that allows investors to invest in a startup at an early stage without determining a valuation upfront.

SaaS

Software as a Service, a software licensing and delivery model where software is licensed on a subscription basis and is centrally hosted.

Solo Capitalist

An individual investor who manages their own fund or capital without a large traditional firm structure.

TVPI

Total Value to Paid-In Capital, a performance metric for private equity funds that measures the total value of investments (realized and unrealized) compared to the capital contributed by LPs.

Unicorn

A privately held startup company valued at over $1 billion.

Timeline