📶 The end of opportunity funds?

This Week in Venture

Lux bails on opportunity fund 😬

Lux Capital is back on the fundraising trail targeting $1 billion for Fund VIII.

One notable difference is that this vehicle will not include an opportunity fund for the firm to double down on its winners.

Why it matters: Opportunity funds gained popularity during the last VC hype cycle.

Companies were raising boatloads of money, they were able to show markups quickly, and LPs wanted to boost ownership by doubling down on the winners in the portfolio.

As you already know now, most of these markups were not due to traction, but instead they were driven by hype and growth investors pre-empting rounds before they could assess whether the valuations were justified (hint: they often weren’t).

Fast forward to today, and many opportunity funds that were raised to deploy capital from 2020 - 2022 are still underwater, and LPs are second guessing the strategy.

What happens next: This is another shift in the overall fundraising market.

Low interest rates give limited partners other places to park their money, and VC funds are retreating to their original investing strategies in order to hit their closing targets.

We’ve already seen funds like YC, Founders Fund, and Vibe Capital slash the size of their funds, and we expect to see more of the same.

Investment bankers are bored 🥱

32 companies have IPO’d this year with a market cap >$50 million, and $2.3 billion in proceeds have been paid out as of yesterday.

This may not seem until you see how these numbers compare over the past five years.

Not good.

Why it matters: When the IPO market goes quiet, it's not just investors who feel the effects.

Investment banks are the ones who help take companies public, and when IPOs slow down, their revenue stream takes a hit. Underwriting IPOs and M&A deals became a bigger portion of revenue from 2019 - 2021, but now it’s obvious that the gold rush is over.

Nobody wants to go public during a downturn, and this affects exit timelines for private tech companies.

VCs won’t be able to capitalize on early investments, and they will have to wait to get liquidity once the market improves.

What happens next: Banks operate like any other business, and if their top line is down, they’ll be forced to make cuts to adjust. This has already started to happen, and we think it will continue.

Founders and early employees will remain illiquid (paper rich; cash poor) for longer, and there will be second order effects from this. Unprofitable companies will lose more leverage with existing investors, go out of business, or be forced to go public at a discount. None of those seem ideal, especially for the common shareholders.

VCs are forced to play an even longer game while they wait to exit their positions. This will be more frustrating for early-stage investors that rely on power law dynamics to drive returns.

Limited partners into venture capital funds provide capital in exchange for distributed returns, not markups. A bad public market means bad timing for IPOs means more waiting for companies and funds means no distributed capital back to LPs. Rising rates have already given larger institutions a reason to park their cash in less-risky asset classes (multiply large numbers by the current rate on T-bills for quick math on why); this will just add more support for that change in investment preferences.

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- Clay and Tyler