Investors Pour Into Venture Capital Funds Even as Markets Cool

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. 

Tusk Venture Partners, co-founded by political strategist and startup investor Bradley Tusk, is set to start raising a new fund in the first quarter, after closing one in April, according to a person familiar with the matter. Cybersecurity-focused venture firm Forgepoint Capital is raising a new fund of up to $750 million, according to a securities filing. Deal makers from Tiger Global Management LLC and Coatue Management LLC recently departed to raise their own startup funds. 

Over the summer, Sarah Guo decided to launch her first fund, Conviction. Ms. Guo, who spent nearly a decade at venture firm Greylock Partners, said she raised $101 million in close to three months. She said at least one limited partner asked her if she was crazy to start a fund in a downturn.

“You just become immune to all the reasons you shouldn’t do something at some point,” Ms. Guo said. She added that she expects her fund will perform much better than if she had started it when valuations were higher and she would have overpaid for startups.

Venture has outperformed other asset classes in prior down cycles. About 75% of venture-capital funds raised from 2007 to 2016 beat out the Russell 2000 during that time, and roughly 60% beat the S&P 500, according to a 2021 research paper published in the Harvard Business Review. According to research from the University of Miami, venture-capital returns during the dot-com crash and the 2007-09 recession averaged a 16% gain, while the S&P 500 lost 12% and the Nasdaq declined 18%.

Still, the monthslong drop in public stocks has left some university endowments and public pensions overexposed to venture capital, where valuations on paper remain largely inflated. Now, some of these funds have illiquid asset allocations that well exceed the amount that investment chiefs had targeted or that their investment policies allow. A recent survey by investment bank

Jefferies Financial Group Inc.

found that certain asset managers including endowments and pensions are less interested in venture-capital investments in 2022 than in previous years. Jefferies concluded that there was a “limited appetite” for venture among the survey participants.

The retreat by some large asset managers has made room for an influx of limited partners from Europe, China, the Middle East and Singapore. Many Asian funds have offices in Singapore, and several venture capitalists said they made trips there in the past couple of months to seek funding. Sovereign-wealth funds have approached venture firms with more frequency, because many have an abundance of capital owing to gains from high energy prices, said venture capitalists and lawyers who work on funding deals.

Limited partners say they are being more selective about who gets their money. Some want venture funds to spend their money more slowly, and are asking for proof of due diligence done on deals, said deal makers. 

“There is more time for information, and that feels clearer and healthier,” said

Beezer Clarkson

of Sapphire Partners, which funds early-stage venture firms. She said Sapphire has maintained its pace of investments this year, including funds that focus on cryptocurrency and digital assets. “You have to invest in down cycles as well as up cycles,” she said, “because you don’t know when the next 10-year bull market is going to start.”

—Heather Gillers contributed to this article.

Write to Heather Somerville at [email protected]

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. 

Tusk Venture Partners, co-founded by political strategist and startup investor Bradley Tusk, is set to start raising a new fund in the first quarter, after closing one in April, according to a person familiar with the matter. Cybersecurity-focused venture firm Forgepoint Capital is raising a new fund of up to $750 million, according to a securities filing. Deal makers from Tiger Global Management LLC and Coatue Management LLC recently departed to raise their own startup funds. 

Over the summer, Sarah Guo decided to launch her first fund, Conviction. Ms. Guo, who spent nearly a decade at venture firm Greylock Partners, said she raised $101 million in close to three months. She said at least one limited partner asked her if she was crazy to start a fund in a downturn.

“You just become immune to all the reasons you shouldn’t do something at some point,” Ms. Guo said. She added that she expects her fund will perform much better than if she had started it when valuations were higher and she would have overpaid for startups.

Venture has outperformed other asset classes in prior down cycles. About 75% of venture-capital funds raised from 2007 to 2016 beat out the Russell 2000 during that time, and roughly 60% beat the S&P 500, according to a 2021 research paper published in the Harvard Business Review. According to research from the University of Miami, venture-capital returns during the dot-com crash and the 2007-09 recession averaged a 16% gain, while the S&P 500 lost 12% and the Nasdaq declined 18%.

Still, the monthslong drop in public stocks has left some university endowments and public pensions overexposed to venture capital, where valuations on paper remain largely inflated. Now, some of these funds have illiquid asset allocations that well exceed the amount that investment chiefs had targeted or that their investment policies allow. A recent survey by investment bank

Jefferies Financial Group Inc.

found that certain asset managers including endowments and pensions are less interested in venture-capital investments in 2022 than in previous years. Jefferies concluded that there was a “limited appetite” for venture among the survey participants.

The retreat by some large asset managers has made room for an influx of limited partners from Europe, China, the Middle East and Singapore. Many Asian funds have offices in Singapore, and several venture capitalists said they made trips there in the past couple of months to seek funding. Sovereign-wealth funds have approached venture firms with more frequency, because many have an abundance of capital owing to gains from high energy prices, said venture capitalists and lawyers who work on funding deals.

Limited partners say they are being more selective about who gets their money. Some want venture funds to spend their money more slowly, and are asking for proof of due diligence done on deals, said deal makers. 

“There is more time for information, and that feels clearer and healthier,” said

Beezer Clarkson

of Sapphire Partners, which funds early-stage venture firms. She said Sapphire has maintained its pace of investments this year, including funds that focus on cryptocurrency and digital assets. “You have to invest in down cycles as well as up cycles,” she said, “because you don’t know when the next 10-year bull market is going to start.”

—Heather Gillers contributed to this article.

Write to Heather Somerville at [email protected]