Demand for VC funds that double down on winning investments is shifting as investors see their best companies as overvalued, overcapitalized and without a clear path to go public.
GPs typically run opportunity funds to back standout portfolio companies as they mature. The pitch to LPs is that it increases exposure to growth-mode companies on the verge of profitability or an IPO.
With the IPO slowdown, that pitch has fallen flat. VCs have dialed back their opportunity offerings—or reoriented those strategies to go after secondary stakes in startups or other venture funds.
In extreme cases, investors are abandoning capital they’ve already raised. CRV is returning more than half its $500 million opportunity fund, the veteran tech investor said earlier this month, citing untenable startup valuations.
Part of the pushback from LPs on continuation funds stems from an “inherent conflict of interest,” said Steve Brotman, founder and managing partner of Alpha Partners.
“Many VCs raised opportunity funds not because of their skillset, but due to high LP demand,” Brotman said. “In essence, many LPs were forced into these funds by top-tier early-stage VCs who said: ‘Invest in both our early-stage and opportunity funds, or we’ll reduce your allocation in the high-performing early-stage fund.’ Now, LPs are the ones cutting back.”
Newfangled opportunity funds
The opportunity fund hasn’t been left for dead, and there are signs that VCs may be changing their definition of the term.
VC firms have raised at least $3.4 billion for opportunity-style funds this year, more than double last year’s total. Still, it’s a far cry from 2021, when at least 120 opportunity funds hit the market with a cumulative $12.1 billion.
Lightspeed, whose opportunity funds are among the industry’s largest, is angling to raise approximately $7 billion across three new vehicles, The Information reported. Up to 40% of that would be earmarked for opportunity-style investments.
But Lightspeed’s preliminary fundraising has reportedly emphasized secondary equity stakes and LP fund positions. The firm could also take controlling stakes and execute turnarounds of floundering firms.
That would depart from the typical opportunity fund playbook of throwing more cash at growing portfolio companies. The shift speaks to how VCs are adapting their strategies to a different market.
Too much money
CRV said there are too many hot startups, too flush with capital, to justify follow-on investments from a valuation perspective.
“Many of the 600 companies we have invested in have grown into market leaders, attracting huge attention and many dollars for their balance sheets,” CRV representatives said in a statement. “As a result, many of our best companies simply don’t need more capital. In addition, there is so much capital out there that as soon as a company shows signs of breaking out prices get driven up and return potential goes down.”
A spokesperson for CRV declined additional comment.
CRV’s current portfolio companies include Cribl, the data analytics platform that raised a $319 million Series E at a $3.5 billion valuation in August. It also led the Series A for no-code app platform Airtable, which was valued at $11.7 billion in 2021.
CRV’s assertion that the best startups have plenty of sources for cash may hold true broadly. But one sector, generative AI, seems ripe for opportunity fund-style investment: large language models require significant investment, and LPs are hungry for exposure.
With an eye on AI, tech-focused Kleiner Perkins raised $1.2 billion for its latest opportunity-style vehicle in June.
“Industries that have been slower to adopt software, and that require human labor for low-level work, like healthcare, legal, finance will see rapid transformation,” the firm said in a statement at the time. “New experiences and the demands of computation will open up opportunities in hardware and physical infrastructure. Imagination is now the constraining factor of the future of technology.”
Paul Hsu, founder and CEO of Decasonic of Chicago, which backs tech and crypto startups, said CRV’s call fell in line with market conditions.
“CRV is a multi-decade firm with multi-decade relationships with LPs, who recognize late-stage strategy requires adjusting, given market conditions,” Hsu said. “LPs applauded when they did this because CRV pursues investments not with greed or to milk fees but because they’re LP-focused.”
Featured image by Hello Africa/Getty Images
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