ask? Because most managers don’t get compensated for performance, and if they make an unpopular investment that doesn’t work out, they get fired. This 2 by 2 grid should explain their thought process.

The point of the chart is that most investment managers would prefer to follow the crowd and look for brand name investments they won’t get blamed for if things go wrong, rather than try to pursue opportunities that they think will produce the best returns. Put another way, they’re incentivized to avoid personal downside, not pursue performance upside.

Also relevant to the discussion is the fact that PE (and venture in particular) is a long term investment. It may be 10+ years before venture investments made today are realized, and at least five years before the investment manager has a solid idea of an investment’s expected performance. Now, consider that many asset managers are looking to advance their careers by either moving to a larger endowment offering a better salary or to the direct investment side of the business (PE or VC), which offers better compensation through carried interest and salary.

High turnover means that the person responsible for an LP’s asset class allocation today may not be the person who actually built the existing portfolio. It can also mean that the original manager doesn’t care about how the investments made ultimately perform, since he or she will probably be on to the next role before it’s even known if a decision was good or bad. This provides further disincentive for investment managers to pursue funds and strategies outside what is trendy or popular.

These factors combine to generate irrational decision-making. No wealthy person would ever (intentionally) manage money this way, yet because institutional capital is usually a pool of public money owned by no single person and managed by a group of individuals with no skin in the game (i.e. personal capital risk), incoherent decisions are regularly made and explained away as the status quo. The people paid to be experts and make hard decisions (investment managers) only stand to lose if they go against the crowd but end up being wrong. It’s a broken system, but those who know the system is broken have nothing to gain from speaking up.

That brings us back to the present. Despite all the macro changes going on with venture capital – the lowering cost to build a company, innovation by companies like AngelList, increased transparency through sites like Mattermark, even regulatory changes like equity crowdfunding – the institutional LP world is still telling the same story from years ago.

These institutions like experienced managers with skin in the game and high integrity. They look for teams with an unassailable strategic advantage. They seek diversification across stage, sector, vintage year and geography. They seek to outperform the market while limiting risk.

And if you happen to know about a job with a better salary and maybe a little bit of decision-making freedom, give them a call.