LPs are feeling the pressure of startups not finding...

LPs are feeling the pressure of startups not finding exits PostedMay9,2016byMatthewLynley

AlltheenergyforventurefundsflowsfromLPs—themoneygoesfromLPstopartnersatfunds,whichinturninvestinstartups.ButsincethenumberofIPOsandexitshasstartedtodryup,thepressureisstartingtoriseonLPs,andVentureInvestmentAssociates’ChrisDouvosknowsit.AndhemadeitabundantlycleartoinvestorsonapanelatTechCrunchDisruptNYtoday.

“There’sthishugeexitsphincter,”Douvossaid.“Sowe’repushingthiscapitaloutandwe’rekindoffeedingthesnake,LPsgivemoneytoGPs,GPsgivetostartups,startupsgetliquidanditcomesbacktoLPsandthecyclestartsoveragain.Whenyou’vegotthisexitsphincterandthesnakeisgettingpackedfullerandfuller,itremindsme…forthoseofyoufamiliarwiththeWuTangClanthere’sasongcalledMethodManwhereoneofthemethodsoftorturetheytalkaboutis,‘I’mgonnasewyourrectumshutandkeepfeedingyou’,that’swhatit’sliketobeanLPtoday.”

That’snottoosurprisingonatakeofthecurrentstateofthetechnologymarket.TherehavebeenafractionofafractionofthenumberoftechnologyIPOsthemarkettypicallyseesinthefirstpartofthe

year.Thatmeansthatliquidityforinvestors—and,inturn,LPs,hasstartedtostall,andthatmeansthatfundsmightstartlookingatalternativeassetclasses.

“Itusedtobeprivatecompanieswouldaspiretogopublic,”FirstRoundCapital’sJoshKopelmansaidonstage.“We’reattheraremomentintimeit’stheopposite.TheminorleagueballplayersaregettingpaidfarmorethantheMVPmajorleagueplayers.Untilthatworksitselfoutinthemarketit’sgonnacreateareallychallengingtimeforthesecompaniesvaluedintheprivatemarketstorealizeanythinginthepublicmarkets.”

Still,venturefundsarestillfindingwaystoraisenewhugefunds.Andreessen-Horowitz,forexample,istalkingtoinvestorsaboutraising$1.5billionforitslatestfund,andotherfundshavebeenabletoraisehundredsofmillions—ifnotbillions—innewfunds.Firmsseemtohaveshiftedtoraisingnewfundseverytwoyearsorso,whichisalsoputtingsomepressureonLPs.

“Alltheenergycomesfromus,iftheLPsstopshowingupthetreeswillwither,”Douvossaid.“Thatsoundsgrandiose,butoneofthechallengesisthepoolofLPcapitalisn’tinfinite,dollarsgoingintoVCcompeteattheinstitutionswherethesedollarscomefromagainstotherassetclasseswhat’smostattractive.Oneofthechallengesventurefacesisthefurthestoutmoney,they’rethelongestoption,andasaresultthere’salotofpressure.

Whileallthisishappening,venturefundsdon’tactuallylooktoobadonpaper.Inthepastfewyearsvaluationshaverisensignificantly,makingfundslookliketheywillhavegoodreturns—iftheyhavetheexitstobackitup.Andsofar,thoseexitshaven’tshownup,andLPsandfundsoffundsneedthoseexitstoshowupinordertoactualizetheirreturns.

Still,therearebuyers,likeApple,FacebookandGoogle.Butthosecompaniesarelookingformorestrategicfitsintermsoftech,talent,andfillingholes,Kopelmansaid.Andthatmeansthatcompaniesthathaven’tquitefiguredouttheirfundamentals,ortherightwaytovaluecompaniesagainstcomparables,that’smakingitchallengingforcompaniestofigureouthowtoexactlyvaluecompanies

theymaypotentiallyacquire.

“There’sahighlevelof[M&A]activity,butIdon’tknowifthere’sahighlevelofdesiretopaypricesdivorcedfromfundamentals,”UnionSquareVentures’AndyWeissmansaidonstage.“Itseemsliketherewasmoreofthatinthepast,butit’slessnow.”

Whilefirmstalkaboutadownturn,anddroppingvaluations,itisn’tanywhereclosetowhatstruckthemarketaround2001and2002,Kopelmansaid.“Asthemarket’sgottenchoppyoverthelastcouplequarters,youhaveawholegenerationoffoundersandfunderswhohaveneverbeenthroughadownturn.Ifyou’rebeenintheindustryforthelast7yearsyou’veseenstraightup.Idon’tthinkit’severasbadaspeoplethinkitis.”

“Oneoftheirsecretsofsuccesshasbeengettingoffthebusonestoptooearlyratherthanonestoptoolate,”Douvossaid.“Butthattakescourage,mostinvestorslackcourage.Onceyousayntoafund,you’reforeverinthatGP’sbadgraces.”

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