LP diligence on the rise with venture fundraising in high gear

By now you’ve heard that venture capitalists in the United States raised more money in the first three months of the year than in any quarter in 10 years.

This is due to an investment environment where opportunities are plentiful and traditional industries, from banking to education, seem vulnerable to disruption.

It also is the result of supply and demand. More funds are in the market seeking money, and, for many established firms, the fundraising cycle has accelerated from three years to two.

LPs have little choice but to re-up or lose the chance.

All this is not lost on Brendan Tyne, managing director at the private equity fund administrator Augentius. Tyne said fundraising activity at the firm is up two to three times from what it was a year ago.

The explanation is simple. “There are a lot of opportunities for funds to invest and get a good deal flow,” Tyne said.

In other words, it is in the best interests of GPs to act now that the VC iron is hot. Distributions to LPs have been good and companies such as Uber remind investors home runs can be hit. But a valuation reset is underway and more challenge times for returns could lie ahead.

“Maybe we’re coming to the top of the cycle,” Tyne said. It is possible the LP community may not be as inviting a year from now.

So far, established venture firms with successful track records have had little difficulty raising capital. In the first quarter, Accel Partners raised $2 billion for growth and early-stage funds and Norwest Venture Partners collected $1.2 billion for its 13th fund. More recently, Spark Capital and Foundry Group set out to collect another $500 million a piece for growth and follow-on investing.

Yet first-time managers appear to be meeting more scrutiny. “It’s not getting easier,” Tyne said. “I think LPs are more cautious.” This translates into longer sales cycles that can last six months to a year or longer for

This translates into longer sales cycles that can last six months to a year or longer for first-time managers.

This is because due diligence is up. LPs are not just looking at deal flow, but examining back-office systems, cyber-security defenses, continuity plans in the event of a senior manager’s departure and even support staff, such as lawyers and accountants. They want to examine the entire business, Tyne said.

What this says about the road ahead is hard to know. Tyne thinks the pace of fundraising is likely to remain steady through the year, but probably not increase significantly.

That would suggest a healthy year for fundraising in the industry and rising LP scrutiny as demands for money stay high.

Photo illustration courtesy of © iStock.com/hynci