The dominance of megafunds is unlikely to abate any time soon in venture capital, concentrating more buying power in the hands of a few. Global investors increasingly want exposure to private technology companies, and many have growing pools of capital dedicated to buying stakes in them.
Endowments, sovereign wealth funds, family offices and pension funds often dedicate a target percentage of their assets to venture capital. Since their total assets have been growing because of a booming stock market, the dollar amount they can devote to venture capital has risen as well.
“Because LPs have to allocate more absolute dollars, it has enabled later-stage funds to get materially larger,” said Michael Kim, founder and managing partner at Cendana Capital, a fund-of-funds manager.
The rise of large funds is reshaping the venture industry. It is moving attention away from smaller, emerging funds, for example, as fewer first-time funds get raised and the amount of capital going to new small funds is on the decline. Large funds have also tended to pour larger sums into startups, and as a result have raised the price of entry for all investors.
Another reason for the increasing dominance of big funds is that large limited partners typically only write checks above a certain value, and don’t invest in funds in which any single limited partner accounts for more than a given share, market participants say. That means that if an increasing number of investors want to write $50m to $100m checks, venture firms raise larger funds to accommodate them.
Meanwhile, the influx of initial public offerings and special-purpose acquisition companies is funnelling liquidity back to investors. Illiquid private-company holdings turn into public stock or cash in investor portfolios—capital that investors must turn into new commitments to venture funds if they are to maintain their allocations to the asset class.
“There has been a general sustained, if not growing appetite for a venture capital footprint,” said Mike Larsen, managing director of Cambridge Associates, a global investment and advisory firm. “What began as a 10% allocation 15 years ago, is often times a 15% allocation, and depending on the risk tolerance and illiquidity tolerance of a client, those numbers could actually go up to 30%.”
The venture market has been tilting toward larger funds for a few years. The shift accelerated in 2020, when funds of $500m or greater accounted for almost two-thirds of the $73.6bn raised by US venture firms, according to PitchBook Data.
So far in 2021, firms such as Thrive Capital and GGV Capital have already collected billions of dollars each for new funds. Other megafunds are also in the market, including Bond Capital, launched by Mary Meeker and other former Kleiner Perkins partners, according to a January WSJ Pro report.
From WSJ Venture Capital Pro