Friday Letter: Partner or perish

There’s a saying in academia: publish or perish. The venture industry will likely hear a similar proclamation in the next several years: partner or perish.

In case you haven’t noticed, the industry has got really crowded. In the US alone, there were nearly 2,900 venture firms at the end of last year, a 2.5x increase from 1,132 in 2013, while assets under management by US VC firms more than tripled to nearly $1 trillion from less than $300 billion, according to the National Venture Capital Association.

“We believe there are too many venture funds today in the market raising capital and that the limited partner universe will have less available capital to invest into VC funds,” said Hans Swildens, CEO and founder of Industry Ventures, which has visibility into about 450 venture funds through its secondary and funds of funds. “We believe there is a supply-and-demand imbalance and it will take longer to raise funds and we will see some VC funds not able to raise their next fund.”

Small VCs will always be able to raise funds, but mid-size firms will need to figure out a strategy if they expect to stick around, much less grow. The largest funds keep getting bigger and adding more capabilities beyond traditional early-stage venture. Take Sequoia ($85 billion in AUM), General Atlantic ($84 billion) and New Enterprise Associates ($25 billion). In addition to massive funds, each invests from early-stage through growth stage, as well as in PIPEs and even leveraged buyouts.

If you don’t have that kind of heft, one simple way to bulk up is to find a big, wealthy partner. That’s what Sofinnova Partners ($2.65 billion) did by teaming up with Apollo ($498 billion). The Paris-based early-stage life sciences investor this week sold a minority stake in return for Apollo committing to invest up to €1 billion ($1.04 billion) to Sofinnova’s funds.

Sofinnova initiated the discussions, Sofinnova managing partner Henrijette Richter told European biotech publication Labiotech.eu. “We wanted to find someone who could help us grow at the same time as keeping our independence,” she said. “We spoke to several players in parallel but quickly zoomed into Apollo because we were looking for the same thing: a partnership of equals.”

It is no small thing that Sofinnova and its portfolio companies will now have access to the investment platform of a global alternatives giant, with capabilities in private credit, equity and real estate. “This will provide us with financial fuel and the ability to accelerate our existing strategy,” Richter told Labiotech.eu. “We will gain access to Apollo’s expansive network, including their limited partner platform, which counts over 1,500 contacts worldwide, including sovereign wealth funds and large pension funds.”

Of course, Sofinnova wasn’t the first firm to figure out the advantage of partnering with a larger PE firm. It is the seventh venture firm to sell part or all of itself since 2018 (see list below). These kinds of deals make sense for both the large alternatives firms and the smaller VCs. The larger firms quickly get access to specialized talent to scale their business in booming sectors like healthcare. The smaller firms gain financial security and the ability to participate in a wider spectrum of investments.

Financial strength is a key concern during downturns. “Firms that have a balance sheet and capital to invest during a downturn have an advantage over firms with no balance sheet,” said Swildens, whose Industry Ventures sold a minority stake to Petershill, a unit of Goldman Sachs, in April 2019.

Swildens makes a compelling argument. I think we’re going to see lots more of these VC/PE partnerships in the coming years. An economic slowdown might even speed up the dealmaking.

Timeline of venture firms selling to PE firms/asset managers

December 2018. Petershill (a unit of Goldman Sachs) pays about $200 million for a “high single-digit” percentage stake in General Catalyst, a Cambridge, Massachusetts-based venture firm focused on early stage through growth investments in software and various other sectors, according to the Wall Street Journal.

April 2019. Petershill buys a minority stake in Industry Ventures, a San Francisco-based firm that manages primary VC funds, secondary VC funds and VC funds of funds.

November 2020. Neuberger Berman’s Dyal Capital Partners and Wafra Inc reportedly buys a 15 percent stake in New Enterprise Associates, a multi-stage investor in tech, healthcare and various other sectors, according to Bloomberg.

May 2021. Petershill pays an estimated $120 million for a 3 percent stake in Thrive Capital, a New York-based multi-stage tech investor, according to Forbes.

February 2022. EQT officially closes on its acquisition of LSP, an Amsterdam-based investor in small and medium-sized life sciences companies.

April 2022. Carlyle announces it will acquire Abingworth, a London-based venture firm that makes early stage and growth stage investments primarily in life sciences and healthcare companies.

May 2022. Apollo says it will buy a minority stake in Sofinnova Partners, an early stage life sciences firm based in Paris.