What’s Driving the Surge of New Venture Funds?
A flurry of million-dollar deals has taken the investment world by storm as we near the end of the year. Several venture firms have announced their new funds, including Artis Ventures, BoxGroup, Playground Global and Singular. Even Partech has joined in, launching a €360 million venture fund.
The current economic climate may make these announcements seem almost shocking, with layoffs and uncertainties looming. But they reveal a few key truths about the market right now.
Insights into the Market
The first undeniable fact is that institutional investors still view venture capital as a lucrative asset class. With more realistic valuations, they see the year 2024 as the ideal time to channel their resources into startups. Additionally, they are determined to keep their partnerships with venture firms that have produced positive results in recent years. This is especially evident after the brief respite they received in the year 2023.
“All of the limited partners were completely overwhelmed by people raising two funds in one year or way more than they usually do,”
said Eric Hippeau, managing partner at Lerer Hippeau, after the firm raised $230 million in 2022, as reported by TechCrunch last year.
The question that remains is to what extent LPs (limited partners) are loosening their purse strings. Despite today’s surge of funding announcements, the answer to this is far from clear.
Steph Choo, a partner at the venture firm Portage, asserts that the fundraising environment is still tough. She believes that what we are witnessing is a result of the ongoing interest in funds with a proven track record and consistent distributions to paid-in capital.
Karim Gallani, general partner at Luge Capital, echoes this sentiment. He explains that limited partners will continue to invest in fund managers who have a knack for selecting top-performing companies and can secure deals in a highly competitive market.
In addition to this, the recent downturn in valuations may catch the attention of institutional backers. Portfolio managers may have overpaid for deals in recent years due to an inflated market, but now they have the opportunity to secure better deals with talented teams.
“As a fund, if you have dry powder, now is the time to deploy because the best historical vintages in venture have come from periods after a valuation reset,”
She also points out that some forward-thinking LPs are looking at these historical trends alongside the broader macroeconomic factors, such as the strong performance of the public market and calls for a soft landing. This may drive renewed interest in the coming year.
The Long-Term Perspective
It’s important to note that LPs may not be exclusively focused on what’s ahead in 2024 but are also considering the longer horizon. This is because venture funds typically invest over a period of 10 years.
Gallani suggests that the surge of new fund announcements may not be a guaranteed sign of prosperity in the year 2024. Instead, it’s more likely that investors are banking on the cyclical nature of the venture industry, which is expected to bounce back soon.
Contributor Connie Loizos also had a hand in creating this article.