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Where is all that money that VCs raised in Q1 of 2022 going to go? Or are the LPs going to reneg?

by EGreg 4y ago

streetcat1 4y ago
Probably optimized for down rounds. Either save their existing investment, or get into other investment for penny on the dollar.
jillesvangurp 4y ago
The same place as the rest of the money: misc investments that are now worth a lot less than a few weeks ago. Or did you think that cash was sitting in some bank account happily inflating month on month? To make that cash available, they'd have to sell shares, bonds, options, etc. that that money is currently invested in at a loss. The better strategy is to wait for a recovery. That might take some time. Selling at a loss to make risky investments in startups is not a good plan. The even better strategy is to invest whatever cash there is into those things more likely to recover quickly rather than sketchy startups as there are likely quite a few undervalued things in the market that could recover by a sweet 10-20% in the next month. And since that money technically belongs not to the investors but rather conservative entities they represent (like pension funds) they are going to have to do conservative things in times like this. Hence the temporary lack of liquidity for startups.
- yowlingcat 4y ago
  That's not how the funds flow works. The capital call structure was baked into the GP's raise from the LP -- if that happens at ATH and is highly beneficial to the GP, then the LP has a contractual obligation to adhere to that structure. As sibling comments have mentioned, of course, whether the GP exercises that contractual right is far more complex and based on the relationship to the LP; and indeed, VC is a relationship driven game, so the natural behavior on part of the GP is to take their time, see how things shake out, use leverage to get better deals and take a wait and see approach. The point is, though, if a VC chose /not/ to take a wait and see approach and instead go out guns blazing to take advantage of a buyer's market -- they would be within their rights to do that.
missedthecue 4y ago
I want to know what Clubhouse is doing with the $110 million they've raised.
peter422 4y ago
Important to understand that when a VC raises a fund, it's just commitments from LPs, not all the money right away. So if a VC "raised" a huge fund and the market shifts and all the sudden their LPs might not like a bunch of huge capital calls, the VCs will become more conservative. Ultimately the VCs customer are the LPs, and they won't do anything that is going to piss off all their customers.
- dopeboy 4y ago
  Capital calls are legal obligations though, right? The "not liking" part is immaterial until the next fundraise and ask is made same LP?
  - dannyw 4y ago
    If you piss off your LPs you won't be fundraising another fund.
    - peter422 4y ago
      Correct. The fund also isn't going to be returned for 5-10 years, so even if you are making great investments that will have huge returns in 10 years, if you have a bunch of annoyed LPs now, you may still essentially get knocked out of the industry.
  - EGreg 4y ago
    Oh please, I've had investors sign legal documents that they'll invest, be legally obligated, and then reneg on those during crypto winter or some other downturn. More than once. The only thing you can rely on is the big ones with a reputation to uphold.

Where is all that money that VCs raised in Q1 of 2022 going to go? Or are the LPs going to reneg?

by EGreg 4y ago

Where is all that money that VCs raised in Q1 of 2022 going to go? Or are the LPs going to reneg?

Probably optimized for down rounds. Either save their existing investment, or get into other investment for penny on the dollar.

jillesvangurp 4y ago

The same place as the rest of the money: misc investments that are now worth a lot less than a few weeks ago. Or did you think that cash was sitting in some bank account happily inflating month on month? To make that cash available, they'd have to sell shares, bonds, options, etc. that that money is currently invested in at a loss. The better strategy is to wait for a recovery. That might take some time. Selling at a loss to make risky investments in startups is not a good plan. The even better strategy is to invest whatever cash there is into those things more likely to recover quickly rather than sketchy startups as there are likely quite a few undervalued things in the market that could recover by a sweet 10-20% in the next month. And since that money technically belongs not to the investors but rather conservative entities they represent (like pension funds) they are going to have to do conservative things in times like this. Hence the temporary lack of liquidity for startups.

yowlingcat 4y ago
That's not how the funds flow works. The capital call structure was baked into the GP's raise from the LP -- if that happens at ATH and is highly beneficial to the GP, then the LP has a contractual obligation to adhere to that structure. As sibling comments have mentioned, of course, whether the GP exercises that contractual right is far more complex and based on the relationship to the LP; and indeed, VC is a relationship driven game, so the natural behavior on part of the GP is to take their time, see how things shake out, use leverage to get better deals and take a wait and see approach. The point is, though, if a VC chose /not/ to take a wait and see approach and instead go out guns blazing to take advantage of a buyer's market -- they would be within their rights to do that.

missedthecue 4y ago

I want to know what Clubhouse is doing with the $110 million they've raised.

peter422 4y ago

Important to understand that when a VC raises a fund, it's just commitments from LPs, not all the money right away. So if a VC "raised" a huge fund and the market shifts and all the sudden their LPs might not like a bunch of huge capital calls, the VCs will become more conservative. Ultimately the VCs customer are the LPs, and they won't do anything that is going to piss off all their customers.

dopeboy 4y ago
Capital calls are legal obligations though, right? The "not liking" part is immaterial until the next fundraise and ask is made same LP?
- dannyw 4y ago
  If you piss off your LPs you won't be fundraising another fund.
  - peter422 4y ago
    Correct. The fund also isn't going to be returned for 5-10 years, so even if you are making great investments that will have huge returns in 10 years, if you have a bunch of annoyed LPs now, you may still essentially get knocked out of the industry.
- EGreg 4y ago
  Oh please, I've had investors sign legal documents that they'll invest, be legally obligated, and then reneg on those during crypto winter or some other downturn. More than once. The only thing you can rely on is the big ones with a reputation to uphold.