While venture capitalists may be pulling back on funding to startups, many seem to be redoubling their efforts when it comes to raising more dry powder—at least for now.
Just in recent weeks alone, several firms have announced monster new commitments to funds. On July 12, Menlo Park, California-based Lightspeed Venture Partners raised more than $7 billion for four funds to invest in early- and growth-stage companies. Two days later, Boston-based Battery Ventures locked up $3.8 billion across two funds. Others, such as CIBC Innovation Banking, Drive Capital, Telegraph Hill Partners, Crossplane Capital and Resolute Capital Partners, all have announced funds in recent weeks ranging from several hundreds of millions of dollars to more than a billion.
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In fact, even as venture funding to startups has slowed, firms raising investment funds are doing better than ever. Already this year, firms have publicly announced nearly $144 billion in funds being raised, according to Crunchbase data. That nearly matches the almost $149 billion announced for all of last year.
Those in the business of advising on alternative assets say the numbers show a few different things. Raising funds can be a lagging indicator of the market, as well as the fact venture has proven to be a strong driver of return in the past decades.
Funding up, funding down
However, those high numbers and the many funds being raised seem to be in direct contrast to a startup ecosystem in which valuations keep getting slashed, funding is difficult to come by, and layoffs are occurring daily.
DePonte said some of the fundraising being announced now actually started in 2021—before the market started to tail off late last year and well before Russia’s invasion of Ukraine sent it off a cliff.
“From my perspective, you are looking at a slow-motion train wreck,” he said.
The heat from the market in recent years made VCs very eager to raise funding, with some starting new raises just 18 months after a previous fund closed, DePonte said. That has led to some of the large fund announcements currently making headlines—which could dry up.
He expects a very different second half of 2022.
“We have LPs telling us (the market) has gotten worse in the last two or three months,” said DePonte, adding some LPs have told him they are done for the year in terms of contributing to funds.
Alan Wink, managing director of the Eisner Advisory Group, who helps with capital sourcing, said the numbers he sees also put the current total of VC fundraising this year nearly at what it was all of last year. Given fundraising’s general performance in the last decade and the returns it has produced, he said he is not surprised.
“VC has been a good place to put money these last 10 years,” he said. “Thus far, I don’t see any slowdown in the numbers.”
Wink agrees a slowdown is likely in the second half as momentum from 2021 dies down and LPs are forced to rebalance portfolios sent into disarray by the sharp tumble of the stock market.
“There will be more rebalancing and that will affect fundraising,” he said.
The shutdown of the IPO and SPAC pipeline could affect LPs also, Wink said. With that exit for many startups being blocked by the cooling markets, LPs are not seeing returns they would normally use to reinvest.
“I think right now there are a lot of macro economic factors you have to keep an eye on,” he added.
With nearly 30 funds of over $1 billion already raised this year, those in the industry think new firms raising their first funds may be the most affected by a slowdown in LP investing.
Raising a fund
One firm that did not face much difficulty raising a new fund this year was New York-based Tusk Venture Partners. Early this year the firm announced the close of its new $140 million fund— double its last fund which closed in late 2019.
Jordan Nof, a co-founder and managing partner at Tusk Venture Partners, said the fund took less than a year to raise, but did say that competition for money had increased. He also has witnessed some fund managers struggle to meet their fund target size.
However, firms that have performed well and have strong relationships with LPs can raise—especially as more people look to enter the LP market and get into the venture world, Nof said. He added most LPs understand venture and know the market has its own twists and turns.
“The VC market is made for long-term investment and LPs know that,” he said. “They have seen many cycles before.”
Illustration: Dom Guzman
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