Demand for technology assets is rampant, and that is a boon for both companies and venture capital firms looking to raise funds in this sector. But it raises challenges for investors, especially smaller ones.
Increasingly crowded out of direct funding rounds for startups by big players such as Japan’s Softbank and sovereign wealth funds, there is a feeling in some quarters that the most popular venture managers sometimes ask too much in return for access to their strategies.
Early-stage venture managers – those that invest in A and B financing rounds – have limited capacity, explained the Asia head of investments at a North American pension fund. Especially the strong performers.
“The ones we target have good returns,” he said. “Every LP [limited parter, or investor] knows it, every LP rushes in. The allocation you get depends on your relationship [with them].” And venture managers tend to only need a $10 million or $20 million commitment, not $100 million, he added.
If it was hard to get access before, it is even tougher these days amid ferocious competition for technology deals in the frantic hunt for the next 'unicorn'.
“Venture capital firms are notorious for being difficult in terms of providing access and information to investors looking to do due diligence,” the pension executive said.
“And now if you want more allocation to early-stage funds, you are expected to fund later-stage vehicles, which may be less attractive and less proven. Brand-name firms are expecting existing investors to back all their products – or they could get shut out altogether.”
This is happening in the US and increasingly in China too, the executive added. In part it’s taking place because successful Silicon Valley venture firms such as Sequoia Capital are increasing their investment in growth-stage and pre-IPO deals in response to Softbank pouring money into later funding rounds, the pension executive said.
VC firms sometimes take a similar approach to obtain commitments for new geographies, the pension executive said. “It may be that LPs want a piece of a flagship US early-stage fund, and are asked to also buy into the manager’s new India strategy. But they don’t know how good the [India] team is.”
In any case, when it come to late-stage buyouts, LPs often insist on co-investing, he added. Co-investment is not realistic for early-stage deals because of the short deal time frame, smaller deal size and immature underlying business model, but it’s becoming more commonplace for subsequent rounds.
... OR JUST FOLLOWING THE MARKET?
Irene Chu, Hong Kong head of new economy and life sciences at consultancy KPMG, has a slightly different take on the trend flagged by the pension executive.
Asked whether successful venture managers were requesting commitments to later-stage strategies as a condition of giving access to funds focused on early-stage deals, she said that because many more family funds are now going into venture investments, there is a greater expectation for VC funds to invest in more mature projects.
Ultimately, Chu said, the “leading venture firms have no problem with raising money and they have a lot of experience with picking the right deals”.
Indeed, venture managers might reasonably argue that the situation is a simple matter of supply and demand, and since technology is currently hot, it will should naturally be more difficult to access sought-after strategies.
See the latest (Summer 2019) edition of AsianInvestor magazine for an extended feature on the changing landscape of technology investment.