Way too many LPs I’m in talks with right now: “I don’t pay carry. Charge me a higher upfront fee instead.” I feel like I helped create a monster in the industry, and it’s now trying to (incorrectly) eat everything.

Back in the day, Hari Raghavan and I at Forge (alongside our colleagues at Equityzen and Sharespost) popularized the upfront-fee, no-carry pre-IPO SPV. This instrument was designed specifically for brokers, to incentivize them towards dealmaking. This is brokers’ role in the ecosystem, after all: to link buyers and sellers without making investment recommendations.

However, this instrument was never designed for the GP / LP relationship. GPs aren’t primarily dealmakers, they are investment managers and fiduciaries to their LPs. This is why SPVs offered by GPs typically have carried interest: it aligns incentives between the GP and the LP. GPs only make money if they bring their LPs great investments.

What’s interesting is that recently, the lines between brokers, GPs, and LPs are blurring. GPs are approaching the space like brokers, and LPs are increasingly taking on GP-style deal scouting. This has led to a proliferation of upfront fee, no-carry SPVs. But to be clear… a no-carry structure means that all investment selection and management responsibilities fall squarely to the LP.

In my experience (for all but a vanishingly small number of multi-billion AUM LPs with dedicated venture desks), going at it alone with brokers may save you some fees but cost you significantly in alpha. Because the best deals are hunted, not marketed, and are usually the product of very specific and long-term relationships, taste, and judgement.

So, to LPs: do you really want a structure with no-carry SPVs? Because it incentivizes GPs and brokers alike to bombard you with a ton of un-curated deals off the streets. As long as they get an upfront fee, they don’t care whether you make money on it. Instead, find excellent GPs you trust, have them bring you excellent deals, and incentivize them with carry to win alongside you.

With that, I raise my glass in passionate defense of carry.