Funds-of-funds have the unique pleasure of being hounded for money—and begging others for it as well. They’re currently doing both amid a sluggish venture market and an ongoing AI boom.
While 2024 was the smallest fundraising haul for these firms in 16 years, some VC fund-of-fund managers are betting that LPs will come back around, if they haven’t already.
“It’s gotten too easy to build a direct program in a tourist fashion,” explains Ahoy Capital founder Chris Douvos, whose firm backs early-stage venture funds. “People are passing over funds-of-funds to build their own programs, and I think that will present organizational challenges.”
Hiring good managers can be pricey and yield inconsistent results, he says. Still, today’s funds-of-funds must provide more than just financial returns to keep the attention of their own LPs.
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Meanwhile, Cendana Capital founder and CEO Michael Kim, whose firm focuses on seed and pre-seed venture funds, pins that pendulum swing on the larger VC firms, which have expanded across all investment stages and raised record-sized funds.
Not only has this led to more LPs investing directly into those vehicles, but an “oversized exposure to large firms means an oversized exposure to late-stage companies,” he says.
The smart institutions are realizing this imbalance and correcting course—something early-stage funds-of-funds can help with.
Distributions from venture funds are also beginning to trickle in a bit, largely thanks to secondary transactions. Cendana even has a secondaries-focused fund it set up last year with Kline Hill, which Kim says has been quite active. Douvos notes he hasn’t seen a flood of distribution checks from his portfolio managers, but the chatter about potential liquidity among LP advisory committees has noticeably picked up.
Of course, the fundamentals of venture investing are tempering LPs’ excitement about getting capital back from their portfolio funds. “Please sell, but not too soon,” says Douvos to describe his firm’s feelings about portfolio managers partaking in secondaries.
In a similar spirit, Kim’s Cendana encourages VCs to only sell about 10% to 30% of a stake in a startup to hedge their bets.
“Venture is a power law game—only a handful of companies are going to drive fund returns,” he said. In other words: Getting some cash now shouldn’t come at the expense of a startup investment generating large returns down the line.
But it’s public listings that investors across the ecosystem are sorely missing, and it’s less clear whether 2025 will usher in a strong IPO wave.
“Even if we see the market open up, there’s such a backlog of companies that this will be a year of reckoning,” says Douvos. Overvalued pre-IPO companies are a problem for a lot of VCs, and many of those businesses will have to contend with a drop in their valuations once they go public.
Still, Kim notes there’s optimism that we’ll see distributions pick up via M&A thanks to a more favorable regulatory regime under the upcoming Trump administration. It’s also likely to be positive for the crypto and blockchain sector, along with areas like defense and industrial infrastructure.
LPs are also looking forward to VCs and startups getting past the AI hype from the last couple of years.
As the technology becomes table stakes for sectors like business software, we’ll also begin to really see what AI can and cannot do as more applications and products come to market.
And that may be the extent of predictions. “The only thing you can predict is that 2025 will be unpredictable,” declares Douvos.
Featured image by Jenna O’Malley/PitchBook News
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