An increasing number of venture firms may be popping champagne corks ahead of the New Year. Today, a handful of investment firms announced new funds: Artistic CompaniesBoxGroup, Playground Global and Singular closed with funds, while Partech said it was launching a €360 million venture fund.
Against a backdrop of layoffs and continued economic uncertainty, the announcements – particularly in such rapid succession – come as something of a shock. But they point to some underlying truths about the market right now.
Institutional investors are still interested in venture capital as an asset class; with more rational valuations, they see 2024 as a good time to invest money in startups; They are also eager to maintain their relationships with venture firms that have delivered on some of their promises in recent years, especially after taking a breather in 2023.
As Eric Hippeau, managing partner at Lerer Hippeau, told TechCrunch last year, when the firm raised $230 million in 2022: In 2021, “(All) limited partners were completely overwhelmed by people raising two funds in one year or much more than they expected. I usually do.”
The question is to what extent LPs are beginning to relax their finances, and despite today's avalanche of funding news, the answer is far from clear.
Steph Choo, a partner at venture firm Portage, maintains there is still a “difficult fundraising environment.” She believes what we are seeing is a result of continued interest in funds with a strong track record and paid-in capital distributions.
Karim Gillani, general partner at Luge Capital, agrees with this view. The limited partners “will continue to support fund managers who believe they can not only select those companies consistently, but can also participate in those deals when they are competitive,” Gillani said by email.
Falling valuations may also draw the attention of institutional sponsors, whose portfolio managers may have overpaid for deals in recent years due to a frothy market, and who may, at least for the time being, get much better deals with talented teams.
“As a fund, if you have dry powder, now is the time to deploy it because the best historical crops in venture capital come from periods after a valuation reset,” Choo said by email. “Some forward-thinking LPs are also looking at these same historical trends, along with the broader macroeconomy (strong public market performance, calls for a soft landing, etc.), which may drive renewed interest next year.”
Meanwhile, LPs may not be responding so much to what's around the corner in 2024, but rather looking toward a longer horizon, especially given that venture funds typically invest over a 10-year period. years.
As Gillani points out, so many announcements of new funds do not necessarily indicate that 2024 will be “a prosperous year.” Most likely, the venture industry (always a cyclical business) will invariably recover, and that this rebound will occur sooner rather than later.
Connie Loizos also contributed to this article.
