VCs are pushing startups — will their investors tighten the thumbscrews, too?

Many venture capitalists have built large fortunes. Some of the money has been invested in companies that have done well. As fund sizes ballooned to unprecedented levels, management fees that added up quickly became part of their wealth.

Since the market has changed and will likely remain a tougher environment for everyone for at least the next year or two, an obvious question is what will happen now. Will the industry's limited partners demand better terms from their venture managers?

If ever there was a time for the institutions that fund VCs to push back on how fast funds are raised, the industry's lack of diversity, or the hurdles that must be reached before profits can be divided, it's now. The message was the same in many conversations this week. They don't want to put their allocation in top tier funds at risk after years of good returns.

Poorer performers and emerging managers aren't likely to be made demands by them. Why wouldn't you? They suggest that there's less money to spend. There is a divide between the haves and have- nots. When we add someone to our list, we expect it to be for at least two funds, but that doesn't mean we can live up to those expectations if the markets are really tough

Following so much talk about leveling the playing field by putting more investing capital in the hands of women and others who are underrepresented in the venture industry may be frustrating for some. None of them wanted to talk on the record.

If they had more strength, what would they do? Is it possible that they could tell managers what they think? Based on our conversations with a few institutional investors, here are half a dozen gripes that VCs might hear. They want to change a few things if they had their way.

It's weird terms. In recent years, so-called "time and attention" standards, language in limited partner agreements meant to ensure that "key" persons will devote substantially all their business time to the fund they are raising, began to appear less and less frequently. A growing number of general partners have other day jobs and aren't focused on their funds GPs were telling them to give them money and not to ask questions.

Advisory boards are no longer present. A limited partner says that these have fallen by the wayside in recent years and that it is a disturbing development. The board members still serve a role in conflicts of interests, and that might have been better addressed if they had taken more cautious positions.

It's fast raising money. ManyLPs were receiving regular distributions in recent years, but they were being asked to commit to new funds quickly. There was a lack of time diversity for their investors as a result of the compressed fundraising cycles. One manager says that it stinks because there is no price environment diversity. Some VCs invested their entire fund in the second half of 2020 and the first half of 2021.

There are bad attitudes. A lot of arrogance crept into the equation according to severalLPs General partners would be told to take or leave it. There is a lot to be said for a measured pace for doing things, and that as pacing went out the window, so did mutual respect in some instances.

Funds for opportunity. They hate opportunity funds. These vehicles are annoying because they are meant to back a fund manager's "breakout" portfolio companies and are a way for a VC to navigate around his or her fund's size discipline.

There is an inherent conflict with opportunity funds. She can have a stake in a firm's main fund and a different type of security in the same company in the opportunity fund that may be in opposition with that first stake. While her institution's shares in the early-stage fund are pushed down the preference stack, she has offered preferred shares in the opportunity fund.

The LPs with whom we spoke this week said they were not happy about being forced to invest in opportunity funds in order to access their early-stage funds.

Being asked to support other ventures. New strategies that are global in nature have been rolled out by many firms. The sprawl makesdiversification of their own portfolios more complex. They have become uneasy with the expectation that they play along with the mission creeps. OneLP who is very happy with his allocation in one of the world's most prominent venture outfits but who has also grown disillusioned with the firm's newer areas of focus says, "They've earned the right to do a lot of the things they're doing, but there

He went along to get along. The venture firm told him that it wouldn't count the decision as a strike against his institution if it wasn't a fit.

There is a world where people are afraid to put their foot down. The market has a large influence on it. Even if they do some grousing privately, you can be sure that they will still cooperate. Over time, the limited partners who fund the venture industry may grow more timid.

After the dot.com crash of 2000, a number of venture firms let their partners off the hook by downsizing their funds. One of these outfits was the one whereWagner spent many years as a general partner.

Is the same thing going to happen now? Accel was focused on early-stage investments at the time, but today it oversees multiple funds and multiple strategies. They will find a way to use their capital.

If returns don't hold up, there's a chance thatLPs will run out of patience. He said that it takes a number of years to play out, and that years from now, "we might be in a better economic environment."

The time for pushback may have passed. If the current market drags on, he said, "I wouldn't be surprised at all if more favorableLP terms were under discussion in the next year or two." I think that's possible.