Venture Capital Funds
Investors Pour Into Venture Capital Funds Even as Markets Cool
 Nov 02, 2022
WSJ | Heather Somerville

Investors who fund venture-capital firms continue to plow money into the sector, eager for access to hot technology startups even as the industry lurches into a bear market.

Venture-capital funds raised $151 billion in the first three quarters of this year, exceeding any prior full-year fundraising, according to recently released information from PitchBook Data Inc. The money has been concentrated in fewer, larger funds, such as Sequoia Capital’s $2.25 billion and Lightspeed Venture Partners’ $7.1 billion hauls from July. But even first-time fund managers, who tend to struggle in downturns, have so far been resilient. Funding for newcomers is on pace to match or exceed nearly every year before 2021, according to PitchBook.

The surge has added up to a record of nearly $300 billion in so-called dry powder, or money that is available to spend.

Many family offices, sovereign-wealth funds, fund of funds and other so-called limited partners remain steadfast backers of venture-capital firms, convinced that technology trends such as cryptocurrency and artificial intelligence will outlast any economic downturn. Historically, venture capital has offered better returns than other asset classes, even in a recession. Venture-capital firms are still stockpiling larger-than-ever mounds of money, despite the broad decline of tech stocks and persistent inflation. 

“We are actively writing checks,” said Michael Kim, founder of Cendana Capital, which invests in early-stage VC funds. Mr. Kim said his firm’s investment pace remains as active as during the pandemic-driven heyday—early-stage startups are more insulated from macroeconomic trends.

“I think venture is in a good position,” he said. “There’s enough capital.”

There is sure to be some pain along the way. Venture firms will need to mark down their portfolios to reflect public market declines. With little opportunity for startups to go public, there will be fewer exits for venture funds and less money to return to their limited partners. Venture partners said they expect some startups’ valuations to stay stagnant for years, and the number of startups in their portfolio that go out of business to rise by roughly 10%.

“I spend a lot of time thinking about which companies are at risk of running out of money,” said Chris Douvos, founder of Ahoy Capital, a fund that backs early-stage venture-capital firms. 

Venture firm partners decide how to invest the money, and get paid fees by the limited partner based on how much money they are managing. Venture capitalists will need some of that cash to support their existing portfolio companies—some say they are squirreling away 30% to 40% of their funds for startups that might have trouble raising money from new investors. But plenty will be left over to spend on new deals, they say, when the price is right.  

PitchBook’s 2022 research includes funds that were partly raised in the friendlier market of 2021—a venture fund takes on average about a year to raise. Still, the momentum hasn’t let up. In September, Bessemer Venture Partners closed $4.6 billion in funding and Scale Venture Partners closed a $900 million fund; in October, Lowercarbon Capital announced a new $250 million fund. 

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