These days, it’s not easy to be a limited partner who invests in venture capital firms. The “LPs” who fund VCs are confronting an asset class in flux: Funds have nearly twice the lifespan they used to, emerging managers face life-or-death fundraising challenges, and billions of dollars sit trapped in startups that may never justify their 2021 valuations.
Indeed, at a recent StrictlyVC panel in San Francisco, above the din of the boisterous crowd gathered to watch it, five prominent LPs, representing endowments, fund-of-funds, and secondaries firms managing over $100 billion combined, painted a surprising picture of venture capital’s current state, even as they see areas of opportunity emerging from the upheaval.
Perhaps the most striking revelation was that venture funds are living far longer than anyone planned for, creating a raft of problems for institutional investors.
“Conventional wisdom may have suggested 13-year-old funds,” said Adam Grosher, a director at the J. Paul Getty Trust, which manages $9.5 billion. “In our own portfolio, we have funds that are 15, 18, even 20 years old that still hold marquee assets, blue-chip assets that we would be happy to hold.” Still, the “asset class is just a lot more illiquid” than most might imagine based on the history of the industry, he said.
This extended timeline is forcing LPs to rip up and rebuild their allocation models. Lara Banks of Makena Capital, which manages $6 billion in private equity and venture capital, noted her firm now models an 18-year fund life, with the majority of capital actually returning in years 16 through 18. Meanwhile, the J. Paul Getty Trust is actively revisiting how much capital to deploy, leaning toward more conservative allocations to avoid overexposure.
The alternative is active portfolio management through secondaries, a market that has become essential infrastructure. “I think every LP and every GP should be actively engaging with the secondary market,” said Matt Hodan of Lexington Partners, one of the largest secondaries firms with $80 billion under management. “If you’re not, you’re self-selecting out of what has become a core component of the liquidity paradigm.”
The valuation disconnect (is worse than you think)
The panel didn’t sugarcoat one of the harsh truths about venture valuations, which is that there’s often a huge gap between what VCs think their portfolios are worth and what buyers will actually pay.
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TechCrunch’s Marina Temkin, who moderated the panel, shared a jarring example from a recent conversation with a general partner at a venture firm: A portfolio company last valued at 20 times revenue was recently offered just 2 times revenue in the secondary market — a 90% discount.
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