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businessinsider - 6 days ago

VCs are launching new funds and closing deals — even as their own investors consider pulling back. Here s why the venture community is split on what comes next.

The coronavirus-driven economic uncertainty is nothing like other downturns the venture capital community has weathered before, several investors told Business Insider. Some investors are concerned that limited partners will scale back investments, especially family offices and individually wealthy backers. Others like Coefficient Capital have recently announced debut funds even as the uncertainty drags on. The fund was closed above its target near the end of 2019, the cofounders told Business Insider. Several others, however, have had to postpone plans to raise new funds and use currently available investments to support current portfolio companies instead of pursuing new deals. Click here for more BI Prime stories. Startups aren t the only ones worried about future investors. Venture capitalists, too, are starting to grapple with the new economic reality they find themselves in as the uncertainty around statewide shutdowns and work from home mandates halt the in-person networking the industry itself is built on. Just as startups raise funding rounds from VC firms, those firms raise their funds from limited partners, typically referred to as LPs. These are the large institutional investors like university endowments and family wealth offices, that have the ability to make long-term investments in firms funds themselves. But some LPs are more sensitive to market swings than others, and the particularly risk-averse may choose to hold off on writing VCs checks for newer, larger funds as they may have originally planned. We kicked off fundraising at the beginning of the year, TenOneTen partner Minnie Ingersoll told Business Insider over email. [We] did the full partnership pitches at our lead investors from Fund II and have put everything on hold now. We were targeting a $60 million fund III, but [we are] thinking that the target will have to be re-thought. The current market is unlike anything VCs and LPs have weathered before, multiple investors have told Business Insider. The 2001 bubble was primarily driven by the tech industry itself, and so many VC firms lost returns overnight from companies that went bankrupt. The 2008 recession, on the other hand, was driven primarily by massive financial institutions and had tangential effects on the firms on Sand Hill Road. Now, however, no industry is spared and few are at fault. The overhanging uncertainty is difficult to forecast, and the timeline so muddied that even long-term investments by LPs are risky. Most of the LP interest I m seeing is coming internationally from companies who have already been through or are going through their own coronavirus disasters, Vice Ventures founder and managing partner Catharine Dockery told Business Insider. Her firm, which invests primarily in startups in alcohol, tobacco, and marijuana industries, is currently raising $25 million for a yet-to-be-closed fund and has seen more interest from LPs than usual since vice industries typically outperform other industries in a downturn. Coefficient Capital is also among the firms not seeing a lag of interest as it just announced its debut $170 million fund. The consumer-focused VC firm closed the fund, which was roughly $20 million more than it targeted, in the later months of 2019, well before the markets became rocky. People will say they are in business, but not everyone is as active as they should be, Coefficient Capital founding partner Andrew Goletka told Business Insider. If I had a portfolio of 25 companies, it would be really hard to sign new deals. The young firm has just four portfolio companies and signed its latest term sheet last week. Kleiner Perkins also moved ahead with a planned investment in March, but both firms had been keeping an eye on the entrepreneurs for months ahead of the shift. Several other investors told Business Insider they were strictly looking at supporting current portfolio companies instead of writing new checks because of the challenges in accurately vetting new entrepreneurs remotely. There is also pressure from LPs, investors said, to not take on new or outsized risk as outlooks remain uncertain. We are a relatively small fund so the obvious short-term impact is that it s much harder to raise now since the bulk of our LPs are individuals and particularly for us, because we are focused on getting more women to make the mental switch to becoming first time LPs, Seneca VC cofounder and general partner Shirley Schoenfield told Business Insider. Given the risk to small firms and their smaller LP base, many investors predict pre-seed and seed-stage funds will bear the brunt of LP pullback and will have to delay funds or close up shop entirely. But it remains to be seen how quickly the changes incur casualties as startups across Silicon Valley lay off hundreds and capital becomes a hot commodity. Everyone has to take a wait and see approach, Goletka said. No one will know where it will net out. SEE ALSO: Top VC firm Kleiner Perkins says it signed the first term sheet of the work from home era. Here s how it came together. Join the conversation about this story NOW WATCH: Jeff Bezos reportedly just spent $165 million on a Beverly Hills estate — here are all the ways the world s richest man makes and spends his money


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