VC fund extensions are LPs’ new normal—blame sluggish unicorn IPOs

Over 40% of unicorns have been in venture portfolios for at least nine years, pressuring a hallmark of VC: the 10-year fund structure.

Companies with valuations of at least $1 billion now make up two-thirds of the US venture market. Their inability to exit is raising questions about the wisdom of the decade-long fund, according to a recent PitchBook analyst note.

In response to the IPO drought, VCs have requested fund extensions from LPs for vehicles at the end of their lifespans. They’re aiming to sidestep elevated rates, with the hope that IPOs increase soon.

VCs have pushed for fund extensions to get the biggest exit possible. But waiting longer frequently dilutes IRR, according to PitchBook analysts.

Regardless of the hit to returns, LPs are accepting that fund extensions may be the new norm and are adjusting their dry powder expectations. Allocators increasingly expect a 10-year fund to stretch to 11 or 12 years.

Granting extensions often results in disappointment. More than half of funds that receive extensions failed to return the remaining value of the fund at year 10, according to the analyst note.

“It speaks to the risks of these companies, even as unicorns,” said Kyle Stanford, PitchBook’s lead venture analyst. In other words, not all unicorns will get the exit they expect.

Unicorns have more control over their destiny than ever. Their founders typically retain control of the company, and their status as high-value assets means their investors are reluctant to push too hard for an exit.

Stripe, which issued an employee tender offer in February, has been VC-backed for 13 years. Investors have been happy to hold, considering the payment giant’s valuation has ballooned from $20 million to $70 billion.

VCs have gotten creative. Secondaries markets have risen as a way to get liquidity, although startup shares frequently trade at a discount to their last round.

Continuation funds are another option, but they remain much more common in private equity. These funds allow GPs to roll over their portfolio companies into a new fund, resetting exit timelines and allowing LPs a chance to sell.

The consensus: The 10-year model is unlikely to change, at least at scale. That’s in part because recent VC vintages are on track to return more capital to LPs in less time.

The 2020 and 2021 bull market that preceded the recent IPO drought helped make several vintage years since 2014 some of the strongest historically in terms of distributions, according to the analyst note.