The first quarter of the year was littered with iconic Silicon Valley firms securing massive new funds, as more than a handful of investors raised north of $1 billion in fresh capital. Founders Fund, Lightspeed Venture Partners and Accel, for example, all announced such news, and this trend propelled global VC fundraising to a record $16.3 billion in 1Q.
Well, that record was short-lived.
Venture fundraising in 2Q not only matched 1Q but blew right by it. And the trend of well-known firms securing $1 billion-plus in new funds also continued, with just this month Andreessen Horowitz announcing a $1.5 billion vehicle and Kleiner Perkins Caufield & Byers reportedly collecting $1.4 billion. In total, venture firms raised $16.9 billion globally in the last three months—and that figure even excludes KPCB's funds, as closes haven't been confirmed.
These record-breaking quarters have come as a bit of a surprise to some in the industry. Warnings of a cooling in VC have reverberated since late last year, with investors calling upon their portfolio companies to drive aggressively towards profitability as valuations took a bit of a dip from unsustainable levels that had become standard.
So with all signs pointing to a venture capital slowdown, why and how are VC funds raising more capital than ever?
I think last year’s valuation bubble plays a large role. As a result of the obsession with unicorns in 2015, many firms are sporting propped up TVPIs (a performance metric defined as the ratio of fund portfolio's total value in relation to the amount paid in by LPs). The high valuations of yesteryear have made some of these funds look widely successful on paper, as previous investments are now “worth” much more than when the VC initially invested. The issue with this, asBrad Feld has previously pointed out, is gains aren’t worth anything until you can buy beer with them. Paper gains appear great, but the jury's out on if they'll turn into actual cash. With a cooling in VC starting to set in, which will bring valuations down, those pretty TVPIs and paper gains could take a hit.
This leads us back to why VCs are raising money at a higher clip. Their portfolios look amazing right now and they know that future events could (i.e. probably will) drag down certain performance metrics. In short, VC firms are being opportunistic, and who can blame them?
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