Beezer Clarkson on LP Liquidity, Venture Returns and Fund Incentives

Beezer Clarkson leads Sapphire Partners’ investments in early-stage venture funds across the US, Europe and Israel. In this October 2023 conversation with Harry Stebbings, she examines how limited partners construct portfolios, manage liquidity and evaluate venture managers.

Clarkson says understanding the venture power law is crucial. In her experience, a breakout company can change a fund’s entire outcome. She says Sapphire has not seen an early-stage fund return at least three times its capital without a company returning at least the fund’s size, while acknowledging that this is an observation from its experience.

LPs differ in how much overlap they want across managers. Some seek broad seed-market coverage, while others accept multiple funds investing in the same company to amplify an outcome. Each must calculate how a manager’s ownership and the LP’s own commitment translate into portfolio-level returns.

Sapphire focuses on pre-seed, seed and Series A funds, then considers the mix of underlying consumer and enterprise companies. Its research, Clarkson says, found enterprise exits more consistent historically, while consumer companies can produce larger spikes. She notes that future patterns can differ.

The outcome for an early investor can depend on when it sells or distributes shares, including secondary sales before an IPO and public-market lockups. Clarkson says a partial sale can return substantial capital while retaining upside, but liquidity, float and timing impose real constraints.

Asked whether LPs are closed for business, she says no: many remain active but more selective, and total commitments appeared lower than the prior peak. In 2023, slower company fundraising was extending fund deployment periods and changing when managers needed to raise again.

When a manager raises every 12–18 months instead of roughly three years, an LP may draw on future budgets or reduce its check size. Some LPs face liquidity pressure when distributions slow while capital calls and spending obligations continue. Endowments and foundations must also fund their ongoing activities.

There is no universal venture allocation: an LP must consider return goals and liquidity needs. Clarkson notes the risk of stopping commitments entirely because vintage years are difficult to time, but existing funds may continue investing even if the LP pauses new commitments. Missing a sought-after manager’s next fund can also make re-entry hard.

Stebbings and Clarkson speculate about when IPO markets might reopen. She recalls that the post-2000 recovery took years and says managers who can cover their costs may choose to wait before fundraising. Neither interviewee knows when liquidity will return; their dates are 2023 predictions.

Secondary fund positions were appearing at steep discounts, but she says buyers and sellers did not always agree on price. If exit markets remained weak, LPs could face difficult choices about which holdings to sell. A quoted discount in the discussion is an example from Stebbings, not a market-wide measure.

For a manager considering a sale of a major winner to generate distributions, Clarkson recommends speaking with LPs. She thinks selling 10–20% at a large gain can be sensible if it returns meaningful capital while preserving most of the upside. Stebbings points out that selling to improve fundraising metrics can conflict with some LPs’ preference to hold.

Clarkson says LPs still seek access to strong companies, good fiduciaries and well-managed teams, but are applying more scrutiny after a period of momentum and fear of missing out. Strong-looking marks may or may not become realized returns.

Institutional LPs who back a first fund often understand that two or three years is too little to judge a venture strategy. Barring a material team or strategy problem, she says many will support fund two; more evidence tends to be available by funds three and four. Rapid fundraising can compress those timelines.

She says some early-stage managers were reducing planned fund sizes, for example from $250 million to $150 million, while the details vary. Stebbings sees interest in mid-sized managers; Clarkson says many LPs want checks of $20–25 million in firms with room to grow, but access is limited and many earlier funds have become larger.

Large funds still serve LPs that must write $100–150 million checks and seek returns without taking the same risks as a very small venture fund. Clarkson emphasizes that LPs must also preserve capital and satisfy obligations. Return figures discussed as comparisons are illustrative, not guarantees.

She does not want microfunds to disappear. Platforms and capital from other venture firms can help small managers launch, though a VC using fund investments for deal sourcing must manage substantial data and administration. It remains to be seen whether the strategy produces useful direct deals.

A respected endowment investing in a fund can be a signal, but Clarkson says Sapphire still wants to understand why that fund fits its own portfolio. Different LPs may back the same manager for different reasons, including direct deal access rather than fund returns.

Strong early investments can create a flywheel: successful founders attract other founders, LPs see access to promising deals, and more capital supports the firm. Clarkson notes that research and opinion differ on persistence of venture returns. Past performance does not guarantee future outcomes.

Early-stage outperformance requires taking considered risks in pursuit of unusually large outcomes, she argues. Ownership matters alongside exit size and fund size. Small funds can succeed with modest stakes if outcomes are sufficiently large, but the required mathematics become harder as the fund grows.

Sapphire models a Series A fund toward a three-times return and a seed fund toward five times, then asks what ownership and exit values would be needed for a company to return half or all of the fund. Those are underwriting targets, not promised or necessarily realized returns. Historical exit rates help test whether the assumptions are plausible.

Clarkson wants managers to describe struggling companies candidly, including metrics and uncertainty. She says unusually abundant funding in 2020–22 allowed more companies to keep trying, temporarily obscuring the loss rates venture investors normally expect.

Discussing the gap between total value to paid-in capital, or TVPI, and distributions to paid-in capital, or DPI, she says the gap could be unusually large. Some LPs apply an additional 20–25% haircut to managers’ marks, she says, but that is an example of practice rather than a universal valuation rule.

Different managers can value the same private company differently, depending in part on information rights and methodology. Clarkson says LPs can discuss differences with managers, while Stebbings describes a case where a holding value diverged sharply from a later sale price. The interview does not independently verify that example or the reason for the difference.

Some LP employees are assessed or compensated using TVPI and others using DPI. Clarkson says this can create incentives around portfolio marks, and suggests systems built when marks and eventual distributions were less divergent may fit poorly after rapid valuation increases. Auditors may still require consideration of a recent financing round.

Large fund sizes and management fees can also create misalignment, especially if managers receive substantial fees before returning capital while LPs must meet their own obligations. Clarkson says Sapphire does not invest in the largest funds discussed, and actual economics depend on staffing and other costs.

She evaluates management fees and general-partner commitments in the context of a firm’s business plan. A small fund may need a higher percentage fee simply to pay its expenses; requiring a large personal commitment can unnecessarily exclude emerging managers. She prefers fees to fall appropriately as funds stack up.

High fees and carry make net returns harder to achieve, she says. Fund size also needs to match strategy and ownership: a larger seed fund with small positions requires unusually large exits or a very high success rate. Her examples are underwriting judgments, not universal thresholds.

On fast deployment, Clarkson distinguishes managers who clearly told LPs they would raise annually from those whose original timelines changed. Some LPs have asked managers to slow down or wait for portfolio traction before raising again. Stebbings argues that fear of losing access can make LPs reluctant to challenge a manager.

Clarkson agrees that fear of missing out matters and discusses how an LP employee’s career horizon may differ from the duration of a fund. An allocator trying to protect a job can have a different risk appetite from someone committed to building a long-term portfolio. She does not claim this describes every LP.

Declining to recommit to an existing manager is difficult. Sapphire tries to share the reasons, including portfolio productivity or the manager’s strategy growing beyond its early-stage mandate. A manager raising a much larger fund may have graduated from the program rather than failed.

LPs are discussing whether managers should have taken more liquidity during favorable markets, she says. Secondary sales and distributions are not always possible or harmless: a small public float, for example, can make selling difficult. The relevant question is whether the manager can explain the decision and act as a fiduciary.

Clarkson mentions Union Square Ventures, Founders Fund and Index as examples in a discussion of distributions, while noting uncertainty about the exact metrics behind a cited ranking. These are examples and observations from 2023, not a verified ranking or a guarantee of future performance.

In the quick-fire round, she says limited partnership agreements are often too complex to serve their intended purpose clearly. She also wants managers to understand how their individual investing style fits the firm they are trying to build. Venture funds require a long commitment, often extending well beyond ten years.

She recalls passing on Initialized’s first fund because its size and seed focus fell outside Sapphire’s mandate at the time. In hindsight she considers it a meaningful miss and reflects on when an exceptional person might justify an exception to a program’s rules.

For a small seed fund, Sapphire may underwrite to five times invested capital, but Clarkson cautions that ten-times funds are rare. She says it is difficult to produce strong DPI across three or four consecutive funds. These are her historical observations and targets, not promised returns.

Looking at fund continuation data since 1995, she says the average drop-off between funds one and two was about 50%, and about 7% of first funds reached fund four. She notes variation by vintage and many possible reasons, including limited-partner capacity, manager choice, team changes and performance; these are her analysis, not universal odds.

Even managers that reach later funds may stop raising for reasons ranging from performance or partnership breakdown to a successful decision to retire. She says building a durable firm requires developing the next generation and managing people as well as making investments.

LP views on opportunity funds differ: some use them to access a core fund, while others want the ability to choose separately. Clarkson expects more flexibility in commitments in the following 12 months, a prediction made in 2023. She sees the market as difficult but closer to traditional venture pacing.

She says she hopes to continue this work in ten years. Sapphire recently announced that it would manage CalSTRS’ emerging early-stage venture fund mandate, covering US fund managers in funds one through three. She presents the mandate as additive to Sapphire’s existing program.