LPs Shy Away from Growth Funds, Eye Specialized Early-Stage Managers
Plus, a great debate rages on AI scaling laws
The Main Item
Megafirm Domination of Late-Stage Investing Pushes VCs to Focus on What They Do Best
Several recent fundraising announcements from venture firms stand out for what they’re lacking: growth funds.
Limited partners I spoke with this week said growth funds are currently viable mainly for the megafirms like Lightspeed, a16z, and General Catalyst, which can write large enough checks to drive big late-stage deals on their own. Some LPs are starting to encourage other venture firms to stick to their knitting and focus on earlier stage investments, these people said.
CRV signaled the trend this fall when it returned $275 million in committed growth capital, saying it didn’t see enough opportunities in the market.
Kirsten Green’s Forerunner Ventures closed a $500 million Fund VII this week for early stage investments only, a healthy sum. But it’s a departure from her previous $1 billion fund, which was split between growth and early-stage.
Green told me the firm is still investing out of its previous growth-stage vehicle, but with a “pacing difference.”
One LP told me that a big issue with growth funds is that they need to be big enough to compete with the megafunds of the top VC firms—and it can be very tough for all but the most elite managers to raise such large sums in the current environment.
Collectively, investors deployed slightly more capital into growth-stage deals this year than last, according to PitchBook, but the number of growth rounds is down substantially. The dollar value of growth deals is less than a third of what it was at the 2021 peak.
Global Venture Deals Slow Post-Boom
Multi-stage funds became more popular during the boom times a few years ago, but they’re now proving a tough sell too, said Jason Lemkin, a venture investor and founder of SaaStr. “If you’re an LP, you can invest in a specialized early and growth manager, so why would you invest in one that does the other?” he said.
Opportunity funds, which are deployed to double down on previous early-stage bets, are also out of favor. Some LPs are skeptical that seed and early stage managers will make the right calls when it comes to growth rounds.
Two LPs told me they’re also concerned about liquidity. With both the IPO and M&A markets in the doldrums, it can take a long time to turn even successful investments into cash—especially in light of the valuation overhang from 2021.
“There’s going to be some write downs at year end and the venture industry is going to have a reckoning,” said Neil Datta, an LP who manages fund investments for family offices and wealthy individuals.
The sweet spot for newer, smaller firms appears to lie in early-stage managers who have a proven track record at the bigger funds. Chemistry is a big success here, with the three general partners coming from a16z, Bessemer, and Index Ventures.
Special sauce, such as Harry Stebbings’ podcasting strategy that we discussed last month, can also provide an edge.
A wildcard for emerging managers lies in the long-term strategies of the megafirms. As they ramp up growth investing with multi-billion-dollar funds, they’re beginning to look more like private equity firms, which make much of their profits from the fees they charge for managing the money.
Here’s a look into how the size of the megafunds stacks up against traditional private equity firms:
That sort of investing is itself a specialty. The megafirms still invest across all stages, of course, and their prestige brands give them a big advantage. But in an era of VC austerity, more and more firms will face pressure to do what they do best, and leave aside the rest.