Since IPOS was slow to drip a few years ago, limited partners investing in venture capital funds have had one huge problem. This is a lack of fluidity.
The lack of cash revenues is particularly troublesome for the offices of wealthy individuals and their small family who manage wealthy assets, as they invested heavily in VC funds.
Locking funds in venture capital has been a major problem for entrepreneur Mike Hearst. After selling the exact (the payment startup he founded) to Citi National Bank in 2018, he invested most of the revenue from the exit into tech stocks and venture funds.
Tech stocks then fell in crash in 2022, and Hearst told TechCrunch that he didn't have enough free cash to support his VC fund's commitment.
“Companies kept coming for capital calls and new investments. I wanted to make them, but I didn't want to mortgage my house, take margin lines, or sell Amazon for $90 when I found out I was going back to $210,” he said.
That experience gave Hearst the idea of creating a credit product that allows him to borrow protected funds in the LP position of a venture fund.
Hurst has transformed his vision into Turbine, a debt platform for private equity and limited partners for VCs. The company has emerged from stealth on Friday, and announced that it has raised a total of $22 million in equity funding, co-led by Alpha Edison and TTV Capital, with the participation of Fin Capital, B Capital and Sozo Ventures.
The company also secures up to $100 million in debt from Silicon Valley Bank to support loan manufacturing.
Turbine provides a way for limited partners to access the fund using fund stakes as collateral.
Gardiner Garrard, co-founder and managing partner of TTV Capital, said he was immediately excited by the turbine when Hurst pitched him at the startup.
“There have been a lot of incidents where LPs approach me and ask about liquidity,” Garrard said. However, there were not many great options to help a single investor in the fund get cash.
Garrard explained that TTV was able to sell stocks supporting investors in a portfolio company in the Secretary market, but he didn't want to sell the assets early to provide only one LP needs.
Alternatively, LPs may have tried to sell shares in the fund (known as LP interest), but those transactions “have a huge discount,” Garrard said.
Turbine claims that investors provide liquidity offered to the highly value of their position in venture funds without giving up on future benefits. For example, if the initial $3 million investment in an LP fund grows to $10 million, they could use that $10 million valuation as collateral for the loan.
The downside is that these loans aren't cheap. The interest rate is currently around 9% (the prime rate is currently around 7.5%, so many recent loans aren't cheap).
However, Garrard argues that this could still be considered secondary market stocks, or even discounts, as “a very reasonable rate and much cheaper than the cost of selling.”
Turbine's first customers are five ventures that favored Equity Raise. The general partners of these companies have already provided LPS access to turbine credits, Hurst said, adding that they plan to make the product available to more VC funds after today's announcement.
“I couldn't believe there was nothing like this because of LPS,” Garrard said.