Limited partners in venture capital funds regularly fret over rising valuations, as once-mythical unicorns keep evolving into overgrown pigeons. But a related worry has yet to get much public attention: Over-exposure.
Venture capital funds have always “clubbed up” with one another, meaning that LPs would regularly have multiple exposures to the same portfolio company. But LPs could limit it a bit via their own portfolio management, making sure that they had diversity of VC fund type (i.e., a mix of early-stage, expansion-stage, late-stage, etc.). The historical result was that, if an LP had multiple exposures, it was usually spread throughout the cap table (one or two early-stage exposures, one new Series B/C/D, etc.).
Today, however, the VC world’s lifecycle hierarchy has become all jumbled up, thanks in part to the massive amounts of money being raised by later-stage companies in no rush to go public. The result is that certain LPs have a lot of pricey pre-IPO stock in the same portfolio companies — often inflated even further by separate investments in mutual fund or hedge fund managers that also have dipped down.
Many LPs felt burned by the big buyout club deals that occurred pre-financial crisis, and complained loudly enough that we rarely see such transactions today. Got to wonder when the LP kettle boils over this time around…
Get Term Sheet, our daily newsletter on deals and deal-makers.
