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One of Silicon Valley’s most prominent venture capital firms, Lightspeed Venture Partners, is seeking to use a private equity-style structure to sell $1bn worth of start-up stakes and free up cash to return to investors.
Lightspeed, which has $25bn in assets under management and has made early investments in Snap, Rubrik and Nest, had approached investors about selling a portfolio of 10 holdings it values at roughly $1bn, according to people familiar with the matter.
The technology investor plans to roll the assets into a new vehicle common in the private equity industry known as a continuation fund which Lightspeed would continue to manage, the people said. Lightspeed declined to comment on the fund.
Venture capitalists are under increasing pressure to return capital to their own backers — institutional investors, foundations and pension funds, known as limited partners — as it has become more challenging to exit private market investments. As company sales and public listings have dried up, firms have been forced to find more creative ways of returning money to investors.
“We think VCs can’t just use the excuse that the IPO window is closed, they need to take a page out of the private equity playbook and build more consistent liquidity that LPs can count on,” said Michael Romano, chief business officer at Lightspeed.
LPs increasingly focus on how much value a VC returns to them compared with the amount they pay in — a metric called “distributed to paid in capital” — when deciding where to allocate their funds.
That has concentrated VCs’ minds on distributing cash to investors rather than amassing paper gains.
“If you have poor DPI you’re dead . . . you aren’t going to raise a nickel,” one partner at another multibillion-dollar US venture firm said.
So-called secondary market transactions, where investors can privately trade their existing stakes, have become increasingly central to the private equity industry in recent years and are now gaining traction in venture capital.
Selling the stakes to a continuation fund would give existing investors the chance to cash out, bring in new backers and allow Lightspeed to hold on to the investments for longer. Venture funds typically have a lifespan of 10 years, plus two one-year extensions.
Lightspeed used the secondary market to buy and sell stakes in start-ups last year. The secondary market was “a critical component to generating liquidity”, Romano said.
LPs in large venture firms including Andreessen Horowitz, Josh Kushner’s Thrive Capital and David Sacks’ Craft Ventures had also sold stakes in funds over the past 12 months using the secondary market, according to publicly available fund documents from specialist secondary investor StepStone Group.
Insight Partners, the New York-based tech investment firm, has also raised a continuation fund, while New Enterprise Associates, a venture investor with $25bn in assets under management, had been talking to LPs about launching its own continuation fund, according to multiple people with knowledge of the deal. NEA declined to comment.
One banker who specialises in the secondary market said continuation funds were a way for firms to create liquidity “without [VCs] having to face the market for a proper change in control and valuation”.
Continuation funds can also be controversial with LPs, because they have to decide whether to lock up capital with a VC for another lengthy period or cash out potentially at a discount.