Chris Douvos of Ahoy Capital joins Nick on a special Crisis Coverage installment to discuss the LP Lessons from '01 and '08, The Denominator Effect, Capital Calls & Fundraising in a Down Market. In this episode, we cover:
- What is the denominator problem/effect?
- Why does it matter?
- How do LPs react when they face the denominator problem?
- How quickly do LPs tend to rebalance their investment portfolio?
- What's the implication to VCs?
- How should VCs react when their investors face the denominator problem?
- LPs lose access to future funds if sell position as secondary?
- When VCs make capital calls at times like these, what's the ripple effect down the line for these LPs?
- What were some of the typical LP reactions you've seen from the dot com bubble and the 2008 crisis, that you expect to see again?
- Can you talk more about the thought process of LPs during a crisis like this? Are they rushing to liquidate? Are they putting that money somewhere else?
- VC capital calls - guidance?
- What's the impact on VCs that are fundraising?
- What type of VCs have had success raising in a down market?
- What are some best practices/principles for managing LP relationships in a time like this?(Chris was in PE, as Co-head of PE Investing at the Investment Fund for Foundations in 2008 crisis)
- What was the biggest lesson you've learned from previous crises in 2001 and 2008?
- VC's metrics are dependent on the market, like PME. What's the impact of the current situation on the VCs performance metrics?
- Is there some downward pressure for VCs to lower the Net Asset Value (i.e. the valuation of portfolio companies) to reflect the current market situation?
- Can you explain the disconnect between VCs that want to actively invest (because of lower valuations) and the LPs who are rushing to liquidate?
- What does this mean for later-stage startups that were thinking of IPO-ing in the near future?
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