I've been trying to understand the medium-term implications of your first point for the market.
My understanding is that if a VC raised a $1B fund, and the fund lasts for 10 years, the investments really need to be made in the first 5 years.
If VCs are sitting on the sidelines now, AND making smaller investments, what happens in year 2 or 3 when they have to deploy those funds?
Do you think deal sizes will get outrageously large because of too much money in the system? Will there be another rush to sign deals to deploy the capital?
Does this get talked about by VCs? Am I completely misunderstanding how this will play out?
It's perfectly possible for funds to return the capital to investors and just say "Hey, we couldn't find anything to invest in at a good price, so we didn't", and that'll look better for them because their ROI will still be good.
This is also likely to happen because big investors generally have their investments split between lots of asset classes by some ratio, so let's say for the sake of argument that Harvard's endowment is 30% equities, 30% private equity, 10% fixed income, and a mix of other stuff. If the value of their equities in the stock market fall through the floor that means their ratio is suddenly off, so they're going to need to rotate out of private equity and into equities.
If I'm understanding you correctly, a capital call is a commitment to provide the capital if the VC firm requests it. I thought it was also a commitment on the part of the VC firm to find investments.
So VCs will have smaller Capital Calls until the market picks up again.
I suspect some VCs will get greedy as their Carry is tied to the amount invested, but the smart ones will play the long game.
As in more $$ will go into follow-on companies rather than letting the bad bets die? Or we'll likely see more money going into follow-on rounds, inflating that end of the market?
Oh, follow-on money goes to good bets, and you’d get more aggressive on terms. The good bets get money anyway. I don’t think there’d be much change. But who knows what ppl will do.
My understanding is that if a VC raised a $1B fund, and the fund lasts for 10 years, the investments really need to be made in the first 5 years.
If VCs are sitting on the sidelines now, AND making smaller investments, what happens in year 2 or 3 when they have to deploy those funds?
Do you think deal sizes will get outrageously large because of too much money in the system? Will there be another rush to sign deals to deploy the capital?
Does this get talked about by VCs? Am I completely misunderstanding how this will play out?