When it comes to the opportunity funds, one size doesn’t fit all.
Some funds accompany a single core early-stage fund and support a small handful of portfolio winners. Others seek a broader mandate of new investments and deals linked to several core funds.
Still others start out as single purpose vehicles and become much more.
Whatever shape or form, opportunity funds raised by early-stage firms are a trend in venture capital, with GPs adopting new investment strategies and LPs paying close attention.
The reasons are obvious. With valuations on a seemingly endless rise, opportunity funds offer GPs and LPs a second bite of the apple. They take advantage of pro-rata rights or simply a desire to build large positions in top companies. Early-stage VCs no longer have to pass on Series B and later rounds with startups they know well and believe have bright futures.
“In general, this is a somewhat natural reaction to companies waiting longer to go public and needing to raise more late-stage money, and VCs wanting to be in a position to support the company and take advantage of good opportunities,” said Barry Kramer, a partner at Fenwick & West.
To a large degree, monitoring a $15 million investment doesn’t take that much more time than monitoring a $5 million one. Capital efficiency increases.
Yet there are crosscurrents that bear watching, especially with today’s high valuations. First, funds increase a firm’s capital concentration, even if that concentration is divided between a core early-stage fund and an opportunity, or growth, fund. Second, they can send the wrong signal when they pass on portfolio companies out seeking new money.
“It’s the ultimate momentum investment,” noted Anthony McCusker, a partner at Goodwin Procter.
This story first appeared in affiliate magazine Venture Capital Journal, which is published by Buyouts Insider. Subscribers can read the full story and a related sidebar, “Opportunity funds catch fire,” by clicking here. To subscribe to VCJ, click here for the Marketplace.
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