Ask an LP what they like about venture capital, and the gut response these days is likely to be a long pause.
Limited partners used to have standard answers — usually something about above-par returns for patient investors and an early entry in the growth sectors of the future.
With venture returns for the decade now in negative territory, however, those reasons no longer sound so compelling.
Clearly, LPs are rethinking their venture strategies and overall commitment to the asset class. U.S. venture capital funds raised $1.9 billion in the second quarter of 2010, according to Thomson Reuters and the National Venture Capital Association — the lowest level of dollar commitments in nearly seven years. And while this quarter is shaping up a bit better, fund-raising is still well below pre-financial-crisis levels.
In September’s Venture Capital Journal cover story, “Choosy Shoppers,” I interviewed close to a dozen LPs and advisors involved in the fund-raising process to see what — in this exit-scarce environment — investors do like about venture. (VCJ subscribers can read the story here.)
A few strategies emerged. In some cases, LPs are taking a more hands-on approach to venture holdings. Case in point: Arizona State Retirement System, where private equity portfolio manager Richard Henkel says he looks for how companies and funds in which it holds stakes can benefit each other. This includes leading introductions between, say, a startup software developer and a mature, private equity-backed company that might use its application or even acquire it outright.