If you ask investors to name the biggest challenge for venture capital today, you'll likely get a near-unanimous answer: lack of liquidity.
Due to the lack of IPOs, even though investments in startups and VC funds have risen in value, those bets have not generated much, if any, cash for backers. That's the drawback of private investment and public markets. Shares in private companies, such as startups, cannot be sold freely. Companies must authorize existing investors to sell their shares to authorized others, known as secondary sales.
Cash-hungry venture investors, whether VCs themselves or limited partners, are increasingly looking to sell illiquid positions to secondary buyers.
Add here that many early-stage startups were overvalued during the funding frenzy that peaked in 2021, and their stocks may now be worth less. Let's leave it. This presents a new and unique opportunity to buy shares in seed-stage VC funds and startups at relatively cheap prices.
Today, Cendana Capital, a fund of funds that invests in dozens of seed-stage venture companies, and partner Klein Hill, which focuses on purchasing small, previously owned private assets, announced that Partners announced the creation of a new $105 million Klein Hill Cendana Partners Fund. This far exceeds the original fundraising goal of $75 million.
“Over the past two years, we've been hearing from portfolio funds saying, “A family office wants to sell a $2 million commitment.'' Are you interested in buying?'' Cendana Capital said Michael Kim, founder and managing director of.
Kim felt that the opportunity to expand his company's ownership in venture funds and promising startups at a deep discount was too good to pass up. But because investing in secondary assets requires expertise that none of Cendana's investors have, he decided to work with Klein Hill.
Raising money for the fund was easy, Kim said. Cendana's limited partners wanted Kim to take advantage of this buyer's market.
“We simply handed over the responsibility to the existing LPS in Klein Hill and Cendana,” Kim said.
Buy shares in a seed fund
What makes Cain Hill Cendana's investment vehicle unique is that it purchases secondary interests in seed-stage companies and individual companies from seed funds. According to Kim, most of the existing secondary players are too large to pursue this opportunity.
Michael Kim, Founder and Managing Director, Cendana Capital
I can't help but think there is a symbiotic relationship between the two companies. Cendana's relationships with portfolio funds such as Lerer Hippeau, Forerunner Ventures, and Bowery Capital Kline allow it to take the lead in sourcing secondary deals. These opportunities are then passed on to Klein Hill, who evaluates, underwrites and negotiates the transaction price.
Klein Hill has invested in secondary VCs since its founding in 2015, and managing director Chris Bull said partnering with Cendana brings the type of information that will be extremely valuable to the investment process. He said he would.
“The most exciting thing for us is being able to close deals in places where it would have been difficult for either of us to cross the line alone,” Bull said.
The current plan is to invest the entire $105 million fund by the end of 2024. The companies are testing out the joint venture and, if successful, plan to raise a successor fund next year.
The companies are not alone in seeing a huge opportunity to recoup previously owned venture stakes. Traditional secondaries investors such as Lexington Partners and Blackstone recently raised the largest secondaries fund in history. While these vehicles target all types of personal assets, investors say some of the money will definitely go into venture investments. In addition, Industry Ventures has raised approximately $1.5 billion in funds exclusively for used VC.
But such multibillion-dollar funds “typically focus on much larger, multi-stage companies,” Kim said. Applying such large-scale funding strategies at the seed stage is much less popular.
Kain Hill Cendana is on to something. VC-backed companies tend to remain private longer than investors' 10-year capital cycles, and their need for liquidity is likely to continue to grow.