“Is now the time to double down, or to slam on the brakes?”
That was the question posed to me earlier this week by a portfolio manager who has investments in dozens of venture capital funds, including some of the industry’s most illustrious names. I’m not (quite) so egotistical as to think he would make multi-million decisions on my two cents, but the inquiry was sincere. This is an extraordinarily tricky time to be investing in venture capital, perhaps more so than at any other time in the past two decades.
To be clear, I’m not saying that investment returns are underwater. Quite the opposite. Venture capital fund valuations have been climbing for years, and distributions appear to be at record highs thanks to vibrant IPO and M&A markets. For example, Harvard University’s endowment reported yesterday that its VC return for fiscal 2014 was 32.8% — compared to a 15.4% return for its total portfolio and the S&P 500’s 21.38% gain over the same time period.
But that’s the very problem: Limited partners are not investing a spot prices. They are committing to long-term funds that will (hopefully) begin generating returns several years out. And they worry that if we aren’t at a market top today, we’ll be there when it comes time to begin harvesting — leaving their VC managers with overpriced portfolios that have relatively few exit opportunities.
Most limited partners were around for the last tech cycle, and promised to never again get sucked down the same rabbit hole. Now they see a proliferation of VC firms not only raising $1 billion funds, but also a shortening of the fundraising cycle (most notably Tiger Global seeking $1.5 billion just 5 months after closing its last $1.5 billion pool). So there are all sorts of historical data points to support pulling back right now. But what if this is really 1997 or the first half of 1998, instead of 1999? What if you bail to soon, and leave millions of dollars on the table? And what if this time really “is different,” due to both better fundamental business models, a larger pool of prospective buyers and a milder economic recovery? But, wait, isn’t even considering that “this time is different” a definitive sign to hit the road?
So I gave the portfolio manager my most honest response: I have no idea what he should do, except perhaps to avoid anyone who answers the question with any degree of certainty.
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