This week on the StrictlyVC Download podcast, seasoned VC Aileen Lee openly discussed a significant consequence of the recent boom-and-bust cycle in the tech industry. Many companies are not only struggling to recover from raising excessive funds at unsustainable valuations but have also lost the support of their initial backers.

Lee talked about how limited partners tend to refrain from criticizing influential fund managers due to fear of being excluded from future investment opportunities. However, if they were to speak candidly, they might express concerns such as:

“Everyone wants to invest in prominent funds, so they avoid criticizing them to avoid repercussions. Limited partners might discuss their concerns privately, but if they were to speak freely, they would likely say that many investments made during the ZIRP era were of poor quality.” Lee noted that the individuals responsible for these investments have since moved on, leaving the companies without necessary support. “The limited partners’ investments have essentially been wasted because the venture firm employees didn’t stay long enough to see the companies through to success.”

Lee emphasized that this isn’t the fault of the newer investors. “Many people were given significant responsibilities and funding without proper training or mentorship, resulting in a large number of struggling companies that have been left without guidance.”

Another reason startups are being neglected, according to Lee, is that senior general partners who led the initial investments have stopped engaging with the companies. “It’s surprising to see that, in many cases, companies have been abandoned by the very people who led the investment and are still employed by the firm, but have simply stopped attending board meetings.”

This phenomenon has been occurring for years, particularly since the Covid era, when due diligence was often overlooked in favor of rapid funding. As a result, many companies are now struggling to find external help with exit strategies, and limited partners have valid reasons to express frustration.

Jason Lemkin, another experienced VC, shared similar concerns with this editor in late 2022, when VCs began skipping board meetings for struggling startups. “Shouldn’t there be checks and balances in place? When millions of dollars are invested by pension funds, universities, and individual investors, and due diligence is neglected, it’s a breach of fiduciary responsibilities to limited partners.”

Tune in to StrictlyVC Download every Tuesday for new episodes.