A venture firm just gave investors their money back instead of investing in a shoddy market
Facing poor market conditions, one venture fund is choosing to downsize.
Earlier this week, I discussed how Lightspeed Venture Partners, a venture capital firm with $25 billion in AUM, appears to be expanding into private equity-like investments with its latest fundraise. Why is Lightspeed diversifying away from traditional venture investing to later stage, PE-like strategies? Because $7 billion in new capital will yield a lot of management fees, but it’s really hard to effectively invest $7 billion in venture capital. Lightspeed’s solution? Allocate a large portion of that capital to mature investments.
Another solution to the market size problem, however, is to raise a smaller fund to more effectively invest in smaller startups, or, in the case of venture firm CRV, return some of the capital that you just raised back to investors. From The New York Times:
The firm (CRV) will tell its investors this week that it will return the $275 million that it has not yet invested from its $500 million Select fund, which is designed to back more mature start-ups.
The reason, four of the firm’s partners said in a joint interview, is that market conditions have changed for the worse. The valuations for start-ups are too high relative to their potential for a payoff, the partners said.
Global venture capital funding reached all-time highs in 2021, with ~$694 billion (an increase of more than 100% from the year prior) being deployed across the venture market that year, but that rapid inflow of capital pushed valuations really, really high as more and more money chased a limited number of deals. Combine climbing valuations with a dismal IPO market, and you have an environment filled with richly-valued companies and investors that can’t offload their stakes.
Given current market conditions, I think we’ll increasingly see venture funds fall into one of these two buckets: AUM conglomerates that diversify into other asset classes to make more management fees, and smaller, tactical venture funds that can still effectively navigate the startup market and find good value.
Funds that get stuck in the middle around the ~$1 billion range are in a tough spot: it’s difficult to deploy that much capital at reasonable valuations, especially in early-stage companies, and the management fees on a billion-dollar fund still aren’t spectacular, especially if you have a large team.
