"10 Essential Tips for GPs and LPs on Communicating Bad News in Venture Capital - SVB and Beyond"
Throughout 2022/2023, start-ups faced market instability, geopolitical turmoil, and fears of a recession, resulting in a decline in global venture capital (VC) investments each quarter. By the end of the year, VC investments had dropped by 36% compared to 2021, with funding in Q4 falling by 11% to $86 billion due to investor apprehension across major geographies and industries. Today the US has experienced a severe funding drought, and a bank run, with a 12% decline in funding from Q3 to Q4 of 2022 due to the spike in interest rates, geopolitical risks, and public market volatility — and continuing its decline.
The month ends with Tiger having just told investors the fund had a paper loss of 20%, net of management fees, as of December. That’s worsened from an 8% loss recorded as of June 2022 and an 11% loss as of September that year.
As you can see sharing bad news is never easy, but it is a must.
As a General Partner (GP) or Limited Partner (LP) in a venture capital firm, it's crucial to be prepared for when things go wrong. Effective communication and ethics is key in such situations, as it can help to prevent misunderstandings, manage expectations, and maintain trust.
Here are ten tips to help GPs and LPs communicate when things go bad.
5. Acknowledge responsibility: If the GP or LP is responsible for the problem, acknowledge it and take steps to rectify the situation. Consider all stakeholders, and those that matter most.
6. Offer solutions: GPs and LPs should offer potential solutions to the problem and explain the pros and cons of each.
7. Set realistic expectations: Be clear about what can be done to address the problem and set realistic expectations for what can be achieved.
8. Communicate regularly: Keep LPs informed of the progress being made and communicate any changes or developments.
9. Listen to feedback: Be open to feedback from LPs and address any concerns they may have. Both your legal and regulatory license to operate matters, as well as your "social license to grow and innovate" with LPs.
10. Maintain ethics and professionalism: Maintain a professional demeanour throughout the communication process. Focus only on facts. Avoid becoming defensive or emotional or introducing subjectivity. Focus on finding solutions to the problem. Stick to your ethics.
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Take back to the office
Despite the upsides, only 10% of a seed portfolio is statistically likely to survive. Effective communication is key when things go wrong in venture capital investments.
GPs and LPs should be transparent, act quickly, use plain language, explain the situation, acknowledge responsibility, offer solutions, set realistic expectations, communicate regularly, listen to feedback, and maintain professionalism. By following these tips, GPs and LPs can work together to manage difficult situations and maintain trust in the partnership.
For only together can we accelerate impact!
About the Author
Leesa Soulodre?is the General Partner of R3i Capital,?a global sustainable development venture capital fund?investing in climate change adaptation and the transition to value-based healthcare. Reach out if you would like to learn more about our mission in the?R3i Future Fund.
What’s in our name?
R3i stands for returns, resilience and reliability — three characteristics that are often used to describe or evaluate investments, businesses, or other assets.
Together, these three characteristics can be important factors to consider when evaluating the potential risks and rewards of an investment or asset.
3 i’s — “Intelligence, Innovation, and Insight” are the three characteristics that are often used to describe a venture firm’s edge. R3i synthesises these into its collective and inclusive “impact”.
I have fun mitigating "bad news".