The late-stage market is truly whacked. But it’s not just the startups that are suffering.
Insight Partners, a double-dipper growth equity and late-stage venture investor, recently reduced its fundraising target of $20 billion to $15 billion after raising a measly $2 billion of the pot.
Insight isn’t the only venture firm that has had to deflate its fundraising ambitions. TCV reportedly ended up raising only 55% to 75% of its $5.5 billion target for its fund last year, and Founders Fund cut its target in half from $1.8 billion to $900 million this March. We’ve also seen various firms, including Vibe Capital, return funds that they weren’t confident they could invest.
So what does it mean? While some are acting like this is the writing on the wall for fundraising this year, I think that view paints the industry with too broad a brush. Let’s get real here for a second: These firms wouldn’t be able to deploy all that capital in this climate, and resetting expectations now is better than having to change course later.
To put it into perspective, only $11.3 billion was invested in late-stage companies in the first quarter of this year, according to PitchBook. That’s the lowest quarterly total since the fourth quarter of 2017, which saw $8 billion invested.
Now let’s look at Insight, which was trying to raise $20 billion. If it were to raise that total and the late-stage market didn’t improve drastically over the next year or so, the firm would have to invest in a significant portion of all late-stage deals during their investment period. That wouldn’t allow them to pick and choose investments based on quality. Instead, it would put them in a race to get capital out the door.
Insight, which usually only comes in at the later stages when it is backing a startup, was trying to raise an absolutely laughable amount of money so it could invest in the slowest category in the market right now. I think it would have struggled to raise this much in any year except the boom times of 2021.
Plus, the firm raised a $20 billion growth-equity/late-stage fund just last year, when late-stage funding fell off the cliff. Seriously, what LP would find this situation attractive?
Kyle Stanford, a senior venture analyst at PitchBook, agreed that Insight’s move shouldn’t be taken as a sign of the overall fundraising market — PitchBook doesn’t even consider Insight to be a venture fund.
“Obviously Insight and TCV, they invest in the hardest part of the market to invest in at the moment — late-stage venture, growth-stage companies that should be IPO-ing. It is not necessarily surprising,” Stanford said. “It’s all going to be those large players that announce [such cuts].”
Some firms have always sized their funds by the actual amount they need to raise to execute a specific strategy. Others, however, have always tried to get as much money as they could and figure the rest out later. The problem is, the latter strategy only works when the market is trending upward.
A venture fund in the former camp recently told me that in 2021, it got some negative feedback from their LPs that it should have raised more. The firm sure isn’t hearing that anymore.
Some are still seeing success
While some funds may be struggling to reach unreasonable targets, others are still reaching and surpassing them. Numerous funds have gone out and surpassed their target, including Lux Capital’s latest early-stage fund, QED Investors’ oversubscribed $650 million early-stage fund, and Seedcamp’s $180 million pool.
If you look at the data, emerging managers have been hit hard, but many of them are still able to secure meaningful amounts of capital. Ensemble Capital, for instance, raised $100 million for its debut fund, surpassing its $75 million target.
The Insight news has already revived discourse around LPs souring on venture due to the market. Sure, some family offices or high–net worth individuals are pulling away, but it just doesn’t make sense to conflate these two trends. Saying that LPs aren’t investing in venture because funds may have to compromise quality to deploy on time really isn’t a sign that investors aren’t interested in VC overall.
A great example of this is SoftBank’s Vision Fund II, which struggled to secure even half of the fund’s original $108 billion target. This happened during the bull market and was likely due more to the fact that LPs couldn’t see how the firm could deploy that much as opposed to the fundraising climate.
Just in the past few weeks, we’ve seen multiple deep-pocketed institutional LPs talk about how they actually want to invest more in venture, not less. Both CalPERs said they wanted to broaden their venture portfolios, and the Connecticut State Retirement and Trust Funds is considering setting up a new partnership with a fund of funds to commit $300 million to new venture opportunities, according to meeting documents.
Plus we are still seeing similar LPs commit to new managers. A few months ago, New Mexico State Investment Council backed a Lux Capital fund for the first time — with a sizable commitment — and made its first commitment to Wing VC.
So, no, these big funds’ minor changes in strategy don’t signal much about venture fundraising. Insight still raised $2 billion! It just shows that in a tougher market, LPs are going to be just as choosy as VCs and they aren’t going to take every shiny deal on the table.