Cendana and Kline Hill have just secured a fresh $105 million in funding, a sum that will be directed towards the acquisition of stakes in various seed stage venture capital funds from limited partners looking to sell. This news may come as a relief to investors who have long voiced concerns about the lack of liquidity in the venture capital landscape.
Despite investing in startups or VC funds that have increased in value, the dearth of IPOs in the market has meant that these bets are not generating much, if any, cash for their backers. This is a common drawback of private investment compared to the public market, where shares of companies in private companies like startups cannot be sold at will. Instead, the companies must authorize their existing investors to sell their shares to approved buyers in a process known as a secondary sale.
The rise in demand for secondary sales is a clear indication of the growing need for cash among venture investors. Whether they are VCs themselves or limited partners, there has been an increased focus on selling illiquid positions to secondary buyers.
That’s where the opportunity presented by overvalued early-stage startups comes into play. With the fundraising frenzy peaking in 2021, many startups were able to secure high valuations. However, as the market has cooled down, these shares may now be worth less, presenting a unique opportunity to buy stakes in seed stage VC funds and shares in startups at relative bargains.
Today, Cendana Capital and partner Kline Hill Partners are excited to announce the launch of a new $105 million fund – Kline Hill Cendana Partners. This is significantly above their initial target of $75 million and is a testament to the potential of this venture.
“Over the past two years, we’ve been hearing from our portfolio funds, ‘We have a family office that wants to sell their $2 million commitment. Would you be interested in buying it?’ This presented a great opportunity for us to increase our ownership in venture funds and promising startups at a substantial discount,” said Michael Kim, founder and managing director of Cendana Capital.
Kim was quick to recognize the potential of this opportunity, but also acknowledged that investing in secondary assets requires a specific expertise that none of Cendana’s investors had. That’s why the decision was made to join forces with Kline Hill.
Raising money for this fund was relatively easy, according to Kim. Cendana’s limited partners were well aware of this buyer’s market and were eager for the firm to take advantage of it.
“We simply passed the hat around to our existing LPs at Kline Hill and Cendana,” said Kim.
What sets Kine Hill Cendana’s investing vehicle apart is that it focuses on buying secondary interests in seed-stage firms and individual companies from seed funds. This is in contrast to most existing secondary players who are typically too large to target this market, as identified by Kim.
The symbiosis between the two firms is evident. With Cendana’s strong relationships with its portfolio funds, including Lerer Hippeau, Forerunner Ventures, and Bowery Capital Kline, the firm is well-positioned to source these secondary deals. It then passes these opportunities to Kline Hill, who further assesses and negotiates the transaction price.
While Kline Hill has been investing in secondary VC since its inception in 2015, managing director Chris Bull noted that partnering with Cendana brings the type of information that is extremely valuable in the investment process.
“What’s most exciting for us is we’re able to get transactions done where I think either of us individually would have had difficulty getting across the line,” Bull stated.
With a plan to invest the entire $105 million fund by the end of 2024, the two firms are eager for this joint venture to succeed. If it proves successful, they plan to raise a successor fund next year.
However, they’re not alone in recognizing the potential in scooping up previously owned venture stakes. Traditional secondary investors like Lexington Partners and Blackstone have recently raised their largest secondary funds ever, with a portion of that capital expected to go towards venture. In addition, Industry Ventures has launched a nearly $1.5 billion fund specifically dedicated to secondhand VC.
Kim noted that billion dollar funds like these typically focus on much larger, multistage firms. The application of such big finance tactics to the seed stage is far less prevalent. With Kine Hill Cendana’s venture, they’re truly onto something.
With VC-backed companies choosing to stay private for longer periods of time, the need for liquidity among investors is only likely to grow. This fund is a strategic move that could greatly benefit both Cendana, Kline Hill, and their limited partners in this changing landscape.
