These are good times for venture. Fund performance is up, distributions are at near record levels and GPs remain intensely excited by the innovation at their portfolio companies.
LPs, too, are showing signs of a new warming to the asset class. First half fundraising reached an eight-year high, with $17.3 billion coming into the business, according to data from Thomson Reuters (publisher of peHUB and VCJ).
The inflows show few signs of slowing. In the first seven weeks of the third quarter, through Aug. 17, another $4.3 billion was raised. That brings this year’s total to $21.6 billion, by itself more than any year since 2008.
So when is too much of a good thing a bad thing?
The debate about an asset bubble in venture continues with most GPs shrugging aside comparisons to the bubble years of 1999 and 2000. The industry’s investing and fundraising totals are, in truth, not close to what they were then. But that doesn’t mean there aren’t signs of excess.
Late-stage valuations can be exorbitant. Big-round, big-deal checks startle even seasoned veterans. Now, capital flows are beginning to bear watching.
The issue, of course, is whether fundraising continues at the same pace through the remainder of the year and into next year. Many LPs expect a tapering, especially since a big reason the money faucet opened earlier this year was to fill five billion-dollar and larger funds from Andreessen Horowitz, Technology Crossover Ventures, Norwest Venture Partners, Founders Fund and Accel Partners.
Few similar mega funds appear to be in market now or lining up for next year. New Enterprise Associates apparently has feelers out for a multi-billion-dollar initiative that seems more like a 2015 event rather than a 2014 one. But few others are on the horizon.
Sure, lots of smaller funds are in the market. But it’s unclear if their collective mass is enough to tip the total fundraising scales toward, say, $30 billion this year and next. Most LPs interviewed for this story don’t think so.
They anticipate fundraising this year in the vicinity of $25 billion, with next year’s falling from that level.
“People are looking for portfolio octane and traditionally the place you get it is venture capital,” said Chris Douvos, a managing director at Venture Investment Associates. But “the increase in fundraising is a result of the supply of funds in the market this year. I think we’ll see a slowdown to more typical levels in 2015.”
Douvos and others who hold this opinion could be right. The stirring of new LP interest in the industry is hardly a great up-swelling at this point. After 10 years of venture as the forgotten asset class, fundraising phone calls are being returned, and once reluctant investors and consultants are spending time smartening up on GPs.
But there is no stampede to write checks.
“There is a gentle breeze, a whisper of something changing here,” explained Roland Reynolds, a managing director at Industry Ventures. Perceptions take a long time to change.
Last year’s distributions of $21.5 billion represent slightly less than one-seventh of the $161.1 billion of value created by the 1,493 U.S. venture funds that Cambridge monitors. This suggests that about 13 percent of fund assets passed to LPs. Whether this is enough to justify the current level of fundraising is an open question.
At first blush, it may seen acceptable. After all, GPs distributed $43.8 billion to LPs in past two years. But the total is only 81 cents on the dollar of the $54.4 billion raised during the average two-year period between 2005 and 2009, when the distributing funds were created. Distributions may need to climb higher to justify a pile of new capital.
Despite all this, improving fortunes in venture industry are leading to the “first signs of an LP perception change,” noted David York, CEO of Top Tier Capital Partners. “But it hasn’t turned to action yet.”
Whether it does will bear watching over the next couple years, as will industry capital flows.
Photo illustration by Janet Yuen for VCJ.