The world of venture capital, once a perceived quick path to astronomical returns, is undergoing a seismic shift. For the Limited Partners (LPs) – the institutional investors like endowments, pension funds, and fund-of-funds that fuel venture capital (VC) firms – the landscape has become considerably more complex and, frankly, a bit of a puzzle. These LPs, collectively managing staggering sums exceeding $100 billion, recently gathered to share insights that painted a surprisingly candid picture of venture capital’s current state. While opportunities are emerging from the turbulence, the prevailing sentiment is one of recalibration and adaptation.
The Extended Lifespan of Venture Funds: A New Normal?
Perhaps the most startling revelation from the discussions was the dramatic lengthening of venture fund lifespans. Conventional wisdom once suggested a 13-year horizon for these funds. However, prominent LPs are now observing funds that are not just stretching beyond this, but lingering for 15, 18, and even an astonishing 20 years. Adam Grosher, a director at the J. Paul Getty Trust, managing $9.5 billion, articulated this concern. “In our own portfolio, we have funds that are 15, 18, even 20 years old that still hold marquee assets, blue-chip assets that we would be happy to hold,” he stated. This longevity, while seemingly positive for holding onto valuable assets, signifies a significant increase in illiquidity.
This extended timeline is forcing a fundamental re-evaluation of how LPs construct their portfolios. Lara Banks of Makena Capital, which oversees $6 billion in private equity and venture capital, highlighted her firm’s adjusted modeling. “We now model an 18-year fund life, with the majority of capital actually returning in years 16 through 18.” This means that capital commitments made years ago are taking much longer to mature and return to investors. Consequently, institutions like the J. Paul Getty Trust are adopting more conservative allocation strategies to mitigate overexposure and avoid being locked into illiquid assets for an indefinite period.
The Secondary Market: From Niche to Necessity
In this new era of extended fund lives, the secondary market – where LPs and GPs can buy and sell existing stakes in funds or companies – has transformed from a niche trading avenue into an essential infrastructure component for liquidity. Matt Hodan of Lexington Partners, a behemoth in the secondary market with $80 billion under management, emphasized its critical role: “I think every LP and every GP should be actively engaging with the secondary market. If you’re not, you’re self-selecting out of what has become a core component of the liquidity paradigm.” For LPs struggling with capital trapped in older funds, the secondary market offers a vital avenue to divest, rebalance, or simply generate cash flow. For GPs, it provides an exit for early investors or a way to manage fund concentrations.
The Valuation Disconnect: A Widening Chasm
One of the most uncomfortable truths discussed was the stark discrepancy between what venture capital firms believe their portfolio companies are worth and what buyers are actually willing to pay. This valuation gap, particularly pronounced after the exuberance of 2021, is proving to be a significant hurdle. Marina Temkin, the moderator of the panel, shared a stark anecdote: a portfolio company that had been valued at an astronomical 20 times its annual revenue was recently offered a mere 2 times revenue in the secondary market – a staggering 90% discount.
Michael Kim, founder of Cendana Capital, which specializes in seed and pre-seed funds with nearly $3 billion under management, provided further context. He noted that when sophisticated buyers like Lexington Partners conduct thorough due diligence, they often encounter markdowns of 80% or more on what GPs had previously considered their star or even semi-star performers. This situation is particularly acute for the “messy middle” of venture-backed companies – those experiencing growth rates of 10-15% with annual recurring revenues between $10 million and $100 million, which during the 2021 boom commanded valuations well into the billions. In contrast, public markets and private equity buyers are currently pricing similar enterprise software companies at significantly lower multiples, often just four to six times revenue.
The rapid ascent of Artificial Intelligence (AI) has inadvertently exacerbated this valuation challenge. Companies that focused on capital preservation and navigating the downturn often saw their growth rates stagnate. Now, with AI rapidly advancing and reshaping industries, these companies find themselves in a precarious position. As Hodan explained, “AI has caught on and the market moved past it. These companies are now in this really tricky position where if they don’t adapt, they’re going to face some very serious headwinds and maybe die.” This forces difficult conversations about future growth, market relevance, and, ultimately, valuation.
The Emerging Manager Desert: A Fundraising Battlefield
For aspiring new fund managers, the current fundraising climate is nothing short of brutal. Kelli Fontaine of Cendana Capital underscored this with a telling statistic: “In the first half of this year, Founders Fund raised 1.7 times the amount of all emerging managers. Established managers in total raised eight times the amount of all emerging managers.” This disparity highlights a fundamental shift in LP behavior. During the pandemic-fueled "go-go" years, LPs rapidly deployed larger sums of capital into VC. Now, they are increasingly prioritizing quality and stability, concentrating their investments with established, large-scale platform funds like Founders Fund, Sequoia, and General Catalyst.
“There are many folks, many peer institutions that have been investing in venture as long as we have or longer, and they became overexposed to the asset class,” Grosher observed. This overexposure led to a pullback from those LPs, tightening the capital available for newer, less proven managers. Even firms like Makena Capital, which have maintained a steady pace of onboarding new managers, have shifted their deployment strategy. Banks acknowledged that while they might bring on one to four new managers annually, “the dollars that we deployed in Founders Fund is larger than we’ve deployed in the emerging manager side.”
However, there’s a silver lining. The influx of what Michael Kim calls “tourist fund managers” – individuals who launched funds opportunistically during the boom without deep experience – has largely been “flushed out” by the current market conditions. This culling, while painful for those involved, may ultimately lead to a more focused and experienced crop of emerging managers in the future.
Is Venture Capital Truly an Asset Class?
A provocative question recently raised by Roelof Botha at TechCrunch Disrupt – whether venture capital is truly an asset class – resonated with the LPs. The general consensus leaned towards a nuanced “no,” with some crucial caveats. “I’ve been saying for 15 years that venture is not an asset class,” Kim stated. His reasoning lies in the extreme dispersion of returns. Unlike public equities, where manager performance tends to cluster around a benchmark, venture capital is characterized by outlier successes and significant underperformers. “The best managers significantly outperform all the other managers.”
This inherent unpredictability poses a significant challenge for institutional investors like the J. Paul Getty Trust, as Grosher pointed out: “It’s quite challenging to make plans around venture capital because of the dispersion of returns.” To manage this, they are leaning towards platform funds for a degree of “reliability and persistence of returns,” complemented by emerging manager programs designed to capture alpha – the excess return above a benchmark. Banks offered a broader perspective, suggesting venture’s role is evolving beyond mere portfolio diversification. She cited Makena’s investment in Stripe as a hedge against Visa, positing that venture capital can be a strategic tool for managing disruption risk across an entire investment portfolio, rather than just a passive allocation.
Unloading Shares Earlier: A New Exit Strategy?
The discussion also delved into a shift in exit strategies, with a growing normalization of General Partners (GPs) selling stakes not just at distressed prices but even at premiums during up-rounds. Fontaine shared that a third of Makena Capital’s distributions last year came from secondary sales that were executed at a premium to the last round valuation. This indicates a growing willingness among both GPs and LPs to realize gains earlier, rather than holding out for a home run exit that may never materialize.
Fontaine posed a strategic question: “If something is worth three times your fund, think about what it needs to do to become six times your fund. If you sold 20% off, how much of the fund are you going to return?” This pragmatic approach echoes conversations with veteran investors like Charles Hudson. He recounted an exercise requested by an LP to analyze potential returns if shares were sold at Series A, B, and C stages. While selling at Series A didn’t prove beneficial due to the power of compounding, selling at Series B offered a compelling return of over 3x the fund. This suggests a strategic sweet spot for exits that balances early liquidity with long-term growth potential.
The fading stigma around secondary transactions is a key enabler of this shift. As Kim noted, “10 years ago, if you were doing a secondary, the unspoken thing was that, ‘We made a mistake.’ Today, secondaries are most definitely part of the toolkit.” This acceptance transforms secondaries from a sign of distress into a legitimate and valuable financial tool.
Raising Capital in a Challenging Environment: Strategies for Success
For fund managers seeking to raise capital in this demanding market, the panel offered candid advice. Michael Kim recommended that emerging managers actively "network to as many family offices" as possible, characterizing them as "typically more cutting edge in terms of taking a bet on a new manager." He also emphasized the strategic advantage of offering co-investment opportunities, even suggesting fee-free, no-carry co-investment rights to attract family office interest. The hurdle for most emerging managers remains significant; convincing large institutional investors like university endowments or foundations to invest in smaller funds is exceedingly difficult unless the manager possesses a highly pedigreed background, such as being a co-founder of a prominent AI company.
When it comes to manager selection, the panel’s consensus was clear: proprietary networks are a relic of the past. “Nobody has a proprietary network anymore,” Fontaine declared. In today’s transparent market, even established firms are aware of promising founders. Kim outlined Cendana’s approach, focusing on three critical aspects: a manager’s access to founders, their ability to identify the right founders, and, crucially, their "hustle." He elaborated, “Networks and domain expertise have a shelf life. Unless you’re hustling to refresh those networks, to expand those networks, you’re going to be left behind.”
As an illustration, Kim highlighted Casey Caruso of Topology Ventures. A former Google engineer, Caruso immerses herself in “hacker houses” for weeks to deeply understand founders. Her technical acumen allows her to compete in hackathons, sometimes even winning. This contrasts sharply with what Kim described as a "57-year-old fund manager living in Woodside," who likely lacks such direct and contemporary access to the startup ecosystem. This emphasizes the need for modern, agile approaches to founder engagement.
Regarding sector and geographic focus, the prevailing sentiment pointed towards AI and a general sense of American dynamism. Fund managers based in or with strong access to San Francisco were seen as having an advantage. However, the panel also acknowledged continued strengths in other regions: biotechnology in Boston, fintech and cryptocurrency in New York, and Israel’s tech ecosystem, "notwithstanding the current issues there." Banks expressed optimism for a resurgence in consumer-focused ventures, suggesting that as platform funds have deprioritized this area, "it feels like we’re ripe for a new paradigm."
In essence, the venture capital landscape is evolving. LPs are demanding more clarity, longer-term commitment, and robust liquidity solutions. Emerging managers must be exceptionally resourceful and adaptable, while established players are grappling with the challenges of extended fund lifecycles and recalibrating valuation expectations. The industry’s resilience will be tested, but its capacity for innovation and adaptation remains its core strength.