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📶 what to make of the Lightspeed continuation fund

📶 what to make of the Lightspeed continuation fund

how Lightspeed is working around a closed IPO window to return sticky capital to LPs

January 30, 2024 • Estimated Reading Time: 8 minutes

Good morning 👋

We’re talking about everybody’s favorite subject today: LP liquidity.

Last week, Lightspeed announced it was raising a continuation fund.

We go deep on what that is, why it matters, and what we think happens next in this week’s piece.

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NEWS
Lightspeed looks for liquidity 🔎

Lightspeed Venture Partners recently approached investors about selling a portfolio of holdings valued near $1b, according to the Financial Times. The investor plans to roll the assets into a continuation fund which Lightspeed would then still manage.

If you think that’s confusing, you’re not alone.

Here’s what we think is going on behind the scenes.

Why it matters:

The past decade of VC investing created a lot of bad behavior, and that bad behavior led to lost money (and trust) from LPs. So now LPs want some wins, and they want those wins in the form of distributed capital.

The problem is that traditional liquidity routes (M&A + IPO) have dried up, and funds have started to realize that paper gains don’t equal real returns. So now these funds have started to find more creative ways to return capital back to their LPs.

Lightspeed is doing this by selling secondary shares, but the wrinkle is that the distributions from this sale are being rolled into another Lightspeed-owned vehicle (called a continuation fund).

What happens next:

This type of structure allows Lightspeed to create liquidity without having to test the market for a more accurate valuation.

It also creates a decision for LPs: do they lock up capital with the fund for another lengthy period (usually ten years), or do they cash out at a discount?

We don’t know the answer to that, but we do think this type of structure will become more popular especially with larger venture funds managing billions in AUM. Insight has already raised its own continuation fund, and apparently, NEA is talking about doing the same.