Friday Letter: Firms pick up pace, again, on raising opportunity funds

Once again, early-stage venture firms are raising or talking about raising separate opportunity funds, or late-stage growth vehicles. How the LP community responds to this latest push will determine how the venture industry looks in the next few years.

It’s hard to call opportunity funds a fad. But they are once again en vogue – at least that’s the sense I get from GPs and LPs.

LPs tell me some of their venture fund managers are exploring raising their first opportunity fund, and one GP estimated we’ll see 30 to 40 new ones this year.

Emergence Capital earlier this month raised its first opportunity fund, at the same time that it raised its sixth early-stage fund. In March, Foresite Capital raised its fifth opportunity fund, and Bessemer Venture Partners raised its second in February.

Of course, opportunity funds are nothing new. Union Square Ventures and Foundry Group helped pioneer the opportunity fund trend nearly a decade ago, and other firms – such as Upfront Ventures, Greycroft Partners and Spark Capital – are opportunity fund regulars.

Used primarily by firms to maintain their early-stage pro rata rights in the portfolio when their companies raise larger, growth-stage rounds at high valuations, they are in large part a reflection of the frothy valuations that have continued to grow in the last year.

And since they offer early-stage investors the opportunity to benefit from their portfolio winners in a rising tide of valuations, they are, in that sense, a different animal than the late-stage growth funds managed by the various multistage VCs.

Some LPs I’ve heard from have mixed feelings about them. On the one hand, they just don’t have the available space to add yet another fund to their portfolios. And maybe they’re already at the top of their allocations, but they feel the pressure to back the new opportunity fund to stay involved in the venture firm’s main vehicle.

I asked a growth-stage investor what he thought. His viewpoint was that LPs should be more mindful, considering the pace of fundraising throughout venture has risen to record levels in recent years.

“When the economy pauses and the high valuations pull back, there’s going to be a reckoning for all these opportunity funds,” he said.

What do you think? I’m talking to GPs and LPs now about opportunity funds. If you want to tell with me what you think or you’re interested to hear what I’ve come across, drop me a note at agoldfisher@buyoutsinsider.com.