On paper, VC is still the growth engine.
In practice, the wheels have come off.
LPs across institutions are saying the same thing: Venture Capital remains the theoretical alpha engine in their portfolio construction decks. But the real pain today is startlingly basic — and it's compounding.
Access, selection, and cashflows — three distinct challenges — have quietly fused into one intractable problem. Fix one, the others tighten. It's a system failure masquerading as a performance problem.
The underperformance cascade starts here.
Returns are the first and loudest alarm. Miss the benchmark, and every subsequent decision in the LP playbook becomes harder to justify. It's a compounding cascade of downward pressure that limits strategic optionality.
Softer performance makes it harder to defend fresh VC commitments internally. Which means less ability to "buy your way" into top-tier funds. Over time, the portfolio mix quietly degrades.
The Circularity ProblemOne miss triggers the next. Then the next.
When returns disappoint, LPs don't just face an internal optics problem. They trigger a structural spiral that compounds with each cycle.
4,200+ funds. 90% of value in 10% of companies.
The seed market has never looked more democratic on the surface. Beneath it, the power law is as ruthless as ever.
Where VC Value Actually Lives
Miss those top-decile companies, and a carefully constructed VC program looks "average with illiquidity." Not a great pitch to an investment committee.
Too big for small funds. Crowded out of big ones.
Larger institutions are caught in a particularly uncomfortable bind — squeezed from both ends of the market.
Mega-Managers
Can absorb large check sizes — but are now flooded with retail and wealth management capital. The institutional LP edge has eroded. You're in the same queue as everyone else.
Smaller Funds
Often the best source of alpha — but can't absorb the ticket sizes institutional LPs need to deploy for meaningful portfolio impact. The math simply doesn't work.
The result: a structural no-man's-land where the right-sized opportunity rarely aligns with the right-sized check.
The distribution drought post-2021 hasn't cleared.
Even if you want to lean into this cycle — you're managing commitments, capital calls, and slower-than-expected DPI. The room to "just increase VC" is narrower than it looks in a slide deck.
The Awkward RealityThe best alpha source is the one most LPs are abandoning.
Data keeps pointing toward smaller and earlier funds outperforming established platforms. The institutional machine keeps drifting toward brands. This tension is now acute.
of LPs planned to back emerging managers — a meaningful, optimistic cohort willing to absorb dispersion risk for potential alpha
plan to back emerging managers — a dramatic 24-point collapse driven by difficulty selling unproven track records to investment committees
Emerging managers sit right at the intersection of the problem: highest accessibility, highest potential alpha, highest outcome dispersion. Without a long realized track record, they're nearly impossible to defend at an IC level — even when the data says they should win.
Meanwhile, roughly 50% of LP capital last year flowed to just 9–12 mega-firms. Cambridge Associates estimates nearly 90% of VC value is driven by a small slice of winners — so the institutional drift toward brands is systematically reducing the odds of capturing those winners.