From: allin
Recent Developments in Fund Management
Charles River Ventures (CRV), an early-stage venture capital firm known for investing in companies like DoorDash, Airtable, and Twitter, has reportedly decided to return approximately 500 million growth fund, which was raised in 2022 alongside a $1 billion early-stage fund [00:53:31].
This decision to “call down” less capital is not unprecedented; Founders Fund previously reduced its eighth fund by half, from 900 million, reallocating the extra capital to a future ninth fund [00:54:37]. Trend P also notably returned a significant portion of his fund a few years prior [00:55:03].
Drivers Behind Fund Adjustments
The primary reasons cited by CRV for this adjustment are:
- Worsened Market Conditions for Late-Stage Deals [00:54:14]: The late-stage market has deteriorated significantly.
- High Valuations [00:54:18]: Valuations for startups are still considered too high [00:54:20].
- Lack of Exit Options [00:54:23]: Limited opportunities for initial public offerings (IPOs) and mergers and acquisitions (M&A) [00:54:27].
Chamath Palihapitiya highlighted that private markets must generate more enterprise value than public markets to be a viable alternative to owning public indices, suggesting that generating 1.2 trillion in enterprise value in private tech annually is a significant challenge [00:55:28]. This difficulty is contributing to challenges in venture capital [00:56:06].
Freeberg noted that for a venture firm to return capital, it often needs to have one or two very successful investments (10x, 20x, or 30x the fund) to compensate for the many investments that will not succeed [00:57:51]. This requires reasonable entry prices and sufficient opportunity relative to available capital [00:58:04]. Firms are now realizing they should take less capital and make fewer, more selective investments, avoiding overvalued or lower-tier opportunities just to deploy capital [00:58:31].
The Future of Venture Capital Structure
Chamath suggested that venture capital needs to undergo a phase of rationalization [00:55:54]. He believes LPs have made mistakes by “smearing too much money across too many General Partners” [00:56:08]. He advocated for a smaller total pool of money concentrated into fewer, high-performing managers, and smaller teams over larger ones [00:56:57]. This approach aims to prevent the industry from lagging public, liquid alternatives [00:57:18].
A “weed from the chaff moment” is currently happening in Silicon Valley venture capital, where the froth from many individuals starting venture funds is being cleared out [00:59:30]. The data indicates that smaller venture funds generally perform better [01:03:15].
David Sacks clarified the distinction between a “growth fund” and an “opportunities fund”:
- Opportunities Fund: Typically exists to back up existing winners from the main venture fund, deploying more capital into companies where the firm is already an investor [01:00:41].
- Growth Fund: Underwrites entirely new companies from scratch [01:00:56].
Sacks asserted that the current environment is actually a good time for growth funds, as much of the “crossover capital” (from large investors like Tiger Global and SoftBank) has left the ecosystem [01:01:21]. These larger funds have right-sized, which means less competition and potentially better deals for growth investors [01:01:50].
The larger the venture fund, the bigger the “winner” needed to make it profitable due to the power law. For example, a 3 billion in returns) would need a $30 billion winner if it owned 10% of that company at IPO. Such outcomes are extremely rare [01:02:10].
Related Discussion: Market Environment for M&A and IPOs
The political climate significantly impacts the market for M&A and IPOs, which are crucial exit paths for venture capital investments. A multi-administration antitrust case against Google highlights regulatory scrutiny on big tech [00:50:05].
Sacks predicted that a Republican administration would likely be more permissible towards M&A, as their issues with big tech tend to revolve around censorship and bias rather than sheer size [00:51:04]. He anticipates a significant opening up of M&A and IPOs, helping to clear the existing backlog of companies [01:00:00]. Chamath echoed this, believing that such a shift could lead to “obscene” amounts of money being printed in the M&A and IPO space [01:31:28]. This political stance could have a major impact on venture capital and investment and the overall state of venture capital and exits [00:51:04].