Cendana closes its largest fund of funds as seed investing, valuations recover

Founder Michael Kim says the firm's oversubscribed $218m fund of funds for seed-focused VC firms comes as valuations at the stage are returning to pre-pandemic levels.

This week, Cendana Capital, a seed-stage fund of funds closed its fourth and largest vehicle. 

Cendana founder Michael Kim told Venture Capital Journal in December that he is targeting $195 million for this fund. Despite the covid-19 pandemic, the fund was oversubscribed, receiving $218 million in commitments.

The San Francisco-based investor also closed on additional $60 million for Cendana Longhorns, a fund that it manages on behalf of the University of Texas Investment Management Company (UTIMCO.)

This level of interest from LPs is not surprising.

“Four of our funds are in the top five percentile, according to Cambridge Associates, and two of these funds have already returned all of their capital,” Kim said.    

Cendana’s investment in Mucker Capital alone was a major windfall for the fund of funds. The Santa Monica-based firm owned 7 percent of Honey when it sold to PayPal for $4 billion last fall.

LP Michael Kim Cendana Capital
Michael Kim, Cendana Capital. Seen here speaking at VCJ’s PartnerConnect West in San Francisco, September 2016. Photo by Alastair Goldfisher.

While Cendana’s managers slowed down their investing pace substantially in April and May amid the covid-19 lockdowns, by June it was “back to business as usual,” Kim said. “Our managers are now investing in companies and founders they have not met prior to the pandemic.”

GPs now start the conversation with hearing the company pitch via Zoom, but later in the process, they meet founders on a social distance walk or somewhere outside, he said.

Seed-stage valuations are also back to pre-pandemic levels. “A typical seed round is $3 million at $9 million pre-money company valuation,” Kim said.

“We are meeting new fund managers all the time now and spending time with them on Zoom.”

Michael Kim, Cendana Capital

Although the investment pace and valuations are encouraging signs for the early-stage market, Kim warns of something he calls a “wall of financing.” He said that many start-ups are trying to ride out uncertain times by delaying raising their Series A rounds until later this year.

The risk is that “these companies will come back to the market at the same time,” Kim said, explaining that Series A funds will not be able to absorb the volume of companies in the market. “Company mortality rate will increase in the second half of this year, especially in sectors that will take time to recover from the pandemic, such as events,” he said.  

Cendana’s managers are working with portfolio companies on bypassing the “wall of financing,” by postponing fundraising until 2021, Kim said.

The fund of funds’ fourth vehicle will commit to 10 to 12 managers which invest in seed-stage companies, five firms that back pre-seed start-ups, and four to five GPs based outside of the US, Kim said.

While the majority of the spots are already taken by existing partner funds in Cendana’s portfolio, including Forerunner Ventures, IA Ventures, Lerer Hippeau Ventures, Uncork Capital and Freestyle Capital, Kim said that the LP “has open slots for several new core managers.”

Cendana is also still adding new managers into its pilot program. The fund of funds invests $1 million in GPs whose investing thesis may still need testing, Kim said.

“We are meeting new fund managers all the time now and spending time with them on Zoom,” he said.