Pando

While the rest of tech struggles, so far VCs have raised more this quarter than in past three years

By Sarah Lacy , written on March 24, 2016

From The Venture Capital Desk

Following a year like 2015, you can start to get a little too used to the word “billion.”

Astounding, I know. But even ONE BILLION DOLLARS can lose its impact. It goes from fictional Sean Parker saying  “you know what’s cool?” to Dr. Evil making a ransom demand. It doesn’t sound quite as impressive as it once did -- or should.

So when I read in recent weeks that Accel announced $2 billion in funds, Founders Fund announced $1 billion in new funds, and Andreessen Horowitz is in the process of raising another $1.5 billion, it was hard to put that in context. I mean, yeah. These are major funds. Is it news that they raised a collective $4.5 billion more at some point? Doesn’t mean they’ll invest it any more quickly. All it means is that the two will still be around for another ten years, which we kinda already guessed. It’s staggeringly hard for a venture fund to actually go out of business, even when it wasn’t some of the first money in Facebook or, in the case of Marc Andreessen, sits on its board. [Disclosure: Marc Andreessen, Founders Fund and Accel are all investors in Pando.]

But I also knew there was more coming: It seems like every VC I’ve spoken with lately has been busy fundraising. I figured that was more than anecdotal when I saw this Tweet by Peter Pham yesterday:

So I asked Pitchbook to run the numbers. “Is it a bigger quarter than usual?” I wondered.

Turns out the first quarter of 2016 is on track to be the biggest quarter for venture capitalists to raise funds in three years.

That’s right: While 2016 saw the worst start of a year for stocks and the lowest dry spell for IPOs since the dot com bust, while mega rounds topped out and hedge funds and mutual funds dramatically pulled back from investing in startups, while even the most stalwart of corporate investors-- Intel Capital-- announced it was selling off its portfolio, while the entire tech world-- top to bottom-- spent the first quarter reeling, globally VCs were having their best fundraising quarter in years.

Some 90 funds have raised $17 billion and the quarter isn’t over yet. The bulk of that capital went to US firms-- some $10 billion. Granted, the US alone didn’t have its biggest quarter. But it was certainly one of the larger ones in recent years:

And you could argue given how much international money is flowing into US companies, the global number is more relevant anyway.

This is meaningful because VC fundraising was already at historically high levels. Pitchbook’s year end report of 2015 fundraising described VCs as being “on a tear” showing none of the same slowdown raising their own funds that entrepreneurs had seen raising venture capital cash. From 2014 through the end of 2015, a staggering 500 venture funds closed an insane $69.4 billion. $35 billion of that came in 2015. And as you can see from a $17 billion first quarter, 2016 is hardly slowing down.

This, entrepreneurs, is one of many differences between your life and a VCs life. A downturn hits and whether you deserve for Fidelity to cut your valuation publicly by 40% or not, they do. Whether your company has expanded geographically since its last round, your shares may be priced at less than a year ago, like DoorDash. If Wall Street was in a bad mood over China the day you announced less than stellar growth and your stock fell by 40%.... Well sorry. That’s being “in the big leagues” VCs will say to butt-hurt founders.

And then they’ll continue to live in their non-economically impacted world.

Part of this-- as Pham implies-- is a rush to lock up funds first. It’s a bit like what startups were doing in 2015, raising a mega round in case any nuclear winter is coming. Pitchbook too signaled that such exuberance could end in its 2015 report writing:

...LPs have been piling into VC in particular, entranced by the promise of outsized returns generated by high-profile VC firms. After all, VCs did return $21 billion in the first half of 2015. But the deal making climate has cooled. Liquidity has become a chancier prospect, particularly for many late stage, heavily financed startups. Fundraisers are forward-looking, but LPs are cautious, still open to commit but wishing to see what happens in 1Q. As public market valuations soften, private comparables will correct in turn, potentially paving the way for a resurgence in activity far down the road. But as investment declines gently for now, fundraising will likely follow suit or plateau, as investors seek to put dry powder to work at a slower pace, and consequently take longer to fundraise as well.

It didn’t. I’m not surprised because I’ve covered venture capital for nearing 20 years and this is what happens every time: Everyone expects VCs to have a harder time raising cash once entrepreneurs have a harder time getting exits. But the truth is in the last few cycles, there hasn’t really been a nuclear winter for VCs.

So how can VCs-- the ones who are the enablers of any over-exuberance -- be the only group that doesn’t ever really pay the consequence when things turn south?

It’s ultimately supply and demand. During the late 1990s venture capital not only exploded because of the boom, but it became a standard asset class that far more money managers wanted to invest in. And while VCs raised bigger and bigger funds, there was still limited supply relative to the demand. Compared to giant hedge funds, mutual funds, sovereign wealth funds, there’s only so much money a VC can invest into early stage companies and deliver a 10x return on.

Globalization and the rise of emerging markets have only made this more pronounced. There is a shitload of capital all around the world and at least a small part of it wants to be in Silicon Valley venture capital. The struggle to wedge into top funds is one reason these same institutions just started investing directly in startups in recent years.

Even lackluster VCs will frequently get another chance at it. In recent years, some 85% of all venture funds in the market hit their fundraising goals, according to Pitchbook. Sure, the last two years were good years. But nowhere close to 85% of entrepreneurs seeking funding get it. Even among startups who get seed funding only 35% or so ever get a Series A.

The act of putting together a deck and walking into a sterile conference room to pitch your vision may be similar for an entrepreneur and a VC. It may take way too long to get from “yes” to a check in both cases. And both might go through the same annoying dance where investors want to put money in but only if someone else leads. But in terms of the odds of success, the time given to succeed, and the multiple chances given if you don’t, VCs and entrepreneurs live in radically different worlds.

That’s in part because venture capitalists get to make lots of bets and it is such a hit based business. One deal may be all that matters. Any remotely connected Valley firm can be one deal away from becoming the top of the Midas List.

Consider Chris Sacca-- a man who spent much of his early life in Silicon Valley secretly in crushing debt from poor past decisions, who worked at Google early on but never built a company, and isn’t a programmer. He’s the third top investor in the world now, according to a new ranking, largely because he was friends with Evan Williams in Twitter’s early days and seized on an opportunity, then parlayed that into more smart moves.

Or consider a more dramatic example: Accel. In the wake of the dot com bust, I spoke with LP after LP in great anticipation of some shakeout of the venture world that never occurred. Each of them told me that only two firms might be screwed: Redpoint and Accel. Both are still around, and Accel in particular responded by investing in Facebook. A few years later, Jim Breyer was number one on the Forbes Midas List.

In fact, both Sacca and Breyer have outperformed what would have seemed to be the safest bet coming out of the dot com bust: Kleiner Perkins.

One of the best ecommerce investors in recent years was Kirsten Green. Her first three deals were Birchbox, Warby Parker and Bonobos before she even had a fund.

Simply put: LPs don’t know which individual VCs will get the next hot deal when it comes time for them to write checks, any more than VCs really know what the next hot deal will be when they write checks. And it’s such a comparatively small amount of money for large institutions, that continuing to invest in a fund that may not be looking great, is still a logical bet. At least there’s some track record to look at compared to a brand new fund.

VCs will absolutely groan about fundraising. And it’s not like they snap their fingers and a check arrives. They have to get on planes, yes. They have to explain an industry to investors who may not “get it.” They are going to have to justify the whole unicorn thing.


But the truth is it’s nowhere near as hard for them in a market like this as it is for founders. And once that fund is raised? They’ve got a guaranteed ten years to return it.