General Catalyst, one of Silicon Valley's largest capital firms, is preparing to launch a so-called “continuation fund” worth between $800 million and $1 billion, according to people familiar with the plans.
Continuation funds consist of a portion of the equity that a VC firm holds in its portfolio companies. With approximately $25 billion in assets under management as of 2023, General Catalyst's exact continuation fund portfolio composition has not yet been determined. However, it is likely to include shares in Stripe, Gusto and Circle, the people said. The company recently hired Jefferies as its secondary investment advisor.
Once the fund is established and investors are found, General Catalyst's original limited partners will be given options. They can either sell their shares for cash and make way for new investors, or they can continue investing in a continuing fund, a process known as “rolling.” '
Although private equity firms have long used continuation funds, this mechanism has only recently gained popularity among venture capitalists, primarily due to a lack of IPOs and a slowdown in M&A activity. This has forced some large venture capital firms to use the secondary market to return capital to limited partners.
For example, in July, Bloomberg reported that NEA sold stakes in 11 portfolio companies, including Databricks and Plaid, to secondary investors, who paid a total of $540 million for the assets. Ta. Lightspeed is also currently in the process of selling $1 billion worth of its existing group of companies to second-hand buyers.
Similar to NEA and Lightspeed, the General Catalyst Continuation Fund is comprised of late-stage startups that have increased in value since the firm first invested in the assets.
General Catalyst did not respond to a request for comment.
The main advantage of a continuation fund is that the VC retains control of the stock and retains future upside potential for the stock, as opposed to selling the stock outright to another buyer in a secondary market transaction. Continuation funds are considered more founder-friendly than secondary sales of individual startup shares because they do not introduce new owners to the startup's cap table. The same VCs continue to invest, albeit through different funds.
VCs have recently become more aggressive in selling on the secondary market, as some LPs say they will limit their ability to invest in a VC's next fund if they do not receive at least some cash return from their previous investments. are.
Continuation funds are typically a “win-win” for venture funds, but can be a challenge for certain limited partners. When secondary companies sell their shares, they do so at a significant discount to current valuations (typically 20% to 30% off current valuations), so limited partners can only significantly reduce their existing valuations. Instead, you could be walking away from potential stock price appreciation.
Still, one General Catalyst limited partner told TechCrunch that given the lack of liquidity from venture capital investments, his pension fund always chooses to cash out rather than roll into a continuing fund. .
TC cannot predict when the LP will be offered this option, as the parties have not disclosed. Continuation funds are complex transactions that can take six months to a year to sell. These transactions can also fail completely. Last year, Tiger Global tried selling a type of continuation fund called a strip portfolio, which sells only a portion of each company's shares. However, the company was unable to find a buyer willing to pay what it considered a fair price, Pitchbook reported.
When Shasta Ventures asked limited partners to approve a continuing fund at a 35% discount to book value earlier this year, the company's investors voted against the deal, Axios reported.
In April, the Financial Times reported that General Catalyst was approaching $6 billion in commitments for a new primary fund, but the new fund has not yet been announced. The company declined to comment when TechCrunch asked for more information about its fundraising efforts last week.