Why are venture funds selling out?
Rumours are swirling that Softbank is considering a public listing for its illustrious Vision Fund, the $100 billion vehicle that’s been inflating valuations in tech unicorns since 2017.
I don’t want to lapse into conjecture – it’s just a rumour at this stage, one of many that seem to be doing the rounds in an increasingly febrile atmosphere in the tech sector. But I do think it’s worthwhile to consider the unexpected-but-interesting trend of funds listing or selling to acquirers, even as their underlying investments remain private.
This is fast becoming a “thing”. In recent years we’ve seen a number of prominent funds close high profile transactions:
In October 2017 Draper Esprit, the publicly-listed VC firm based in London, acquired Seedcamp’s first two funds for around $24 million.
In early 2018, Augmentum Capital, the VC backed by Lord Rothschild, raised £94 million in an IPO ahead of a listing on the LSE. The new company acquired Augmentum’s existing investments in a portfolio of 5 fintechs, including some high profile names like Seedrs and Zopa.
Only this month, Romulus Capital (headed up by Krishna Gupta, a very talented classmate of mine from MIT) sold off its first fund for $4 million to Kline Hill Partners, netting a 4x return on initial capital of around $1 million over 10 years.
VCs have always been active on the secondary side, discreetly selling stakes in individual companies to other investors. But until recently, it was almost unheard of to offload entire funds. Traditionally, venture capital has been a waiting game. It required superhuman amounts of patience and perseverance as illiquid private investments took years, often decades, to bear fruit. That was always the pitch to investors, anyway.
So, why is this happening? I can think of a couple of reasons.
Strong returns on paper don’t always translate to cash that can be distributed to investors. Rather than selling down individual positions in portfolio companies in order to return committed capital to investors, there is an argument that divestiture of entire funds is cleaner, more strategic and more transparent to existing investors and prospective ones, too. The alternative is to sell the best performing positions, leaving “zombie” funds composed of less successful investments that can distort track-records and inflict long-term damage to the brand.
An interesting parallel is that of the private equity industry, which went through a wave of listings around a decade ago, on the eve of the global financial crisis. That’s how most of us came to know about the likes of Blackstone and KKR in the first place. Yes, the owners of these firms undoubtedly sought to monetise their stakes instead of simply collecting carried interest and fees. But they also wanted access to permanent capital. In good markets, PE firms can raise external funds, but investors will eventually withdraw capital, so it makes sense to go public in order to secure access to new, more liquid sources of funding. Furthermore, stock exchange listings enabled these previously obscure firms to build brands and reach a wider investor base, composed of both institutional and retail investors.
One can see the clear overlap with the current fashion for VCs going public. If Softbank does come to the market with its Vision Fund, whether with a traditional IPO or a trendy direct listing, I would expect a similar headline story. Masayoshi Son has a talent for PR and will no doubt excel positioning an IPO as a way for a border investor base to participate in his fund’s success.
The cynic’s take on this is different. It’s hard to shake the nagging suspicion that Softbank simply wants to cash out before the music stops. The same theory applies to the glut of recent tech unicorn IPOs. With so many heavyweight founders – backed by top-tier VC firms and global investment banks – rushing to monetise their shareholdings at the same time, you have to ask if they know something we don’t. The answer is out there, and one way or another, in due course, we’re all going to find out.