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LP Outlook on Venture Capital 2016
1
LP Survey Data
@msuster
LP contributions to the VC industry is back to pre-recession highs
(but still well below the 2000 peak)
2
US VC fundraising activity
0
65
130
195
260
$0
$15
$30
$45
$60
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Capital raised ($B)
# of funds closed
237
258
193187
134
150
118
184178
193
162
$35$34
$20
$24$25
$19
$12
$33$34
$37
$22
162
193
178 184
118
150
134
187 193
258
237
Source: PitchBook 2015 Annual U.S. Venture Industry Report.
3
US VC funds annualized cash flow by year
-$60
-$40
-$20
$0
$20
$40
$60
$80
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Contributions ($B)
Distributions ($B)
Net Cash Flow ($B)
17
-11
-5-5
-11
-18
-6-6
-13
-16
8
-11-11
34
26
30
24
19
1011
27
22
11
7
28
1011
-18
-27-29-28
-25
-21
-29
-33
-28
-24-23
-20-21-22
-11 -11
8
-16
-13
-6 -6
-18
-11
-5 -5
1 -1
17
Distributions haven’t made up for a decade of negative cashflows. Markups
don’t pay the bills
Source: PitchBook 3Q 2015 PE VC Benchmarking Report.
The good news is that only 7% of LPs believe they will cut back on venture
programs with 26% of funds looking to increase exposure
4
4%
22%
67%
7%
Source: Upfront Survey Jan 2016, 73 LPs.
How would you describe your fund’s current
allocation to VC?
About the right allocation
Aggressively growing venture Too much allocated to venture
Trying to grow our venture program
40% of LPs have a full bench, 40% looking to add, 20% looking to cut back
5
3%
38%
40%
19%
Source: Upfront Survey Jan 2016, 73 LPs.
How would you describe your fund’s current outlook
on VC managers?
Cutting back on managers
Aggressively add new managers to
our program
Pragmatically add managers to
our program
Happy with our existing roster
But LPs expressed caution, too. Nearly 75% of LPs have concerns about
investment pace, valuation levels and burn rates of underlying companies
6
6%
68%
26%
Source: Upfront Survey Jan 2016, 72 LPs.
How would you describe your fund’s outlook on your
existing (VC) managers activities?
Very happy with investment activities of
our existing managers
Deeply concerned about the market behavior
A bit concerned by pace, valuation
creep and burn rates
61% of LPs believe that VCs are coming back to market to raise money at too
quick of a pace - a reflection of anxieties of the over-funding of portfolios
7
61% 15%
24%
Source: Upfront Survey Jan 2016, 72 LPs.
How would you describe your fund’s outlook in your
existing (VC) managers funding (and fund raising) pace?
Managers come back at a normal
cadence and it hasn’t changed much
Managers have been coming back more quickly
than in the past and we’re fine with this
Managers have been coming back more
quickly than in the past and it concerns us
Even if some short-term concerns, 70% of LPs still bullish on VC as a great
long-term asset
8
30%
69%
1%
Source: Upfront Survey Jan 2016, 71 LPs.
How would you describe your current views on
venture capital overall?
We’re even more bullish about VC than in the past
We still think VC a great long-term asset class.
At current levels, Venture Capital is
starting to feel over-funded
And 82% of LPs are likely to maintain their existing investment pace
9
10%
82%
8%
Source: Upfront Survey Jan 2016, 73 LPs.
How would you describe your likely investment pace
in venture over the next 3 years?
We’re likely to increase our investment pace
We’re likely to keep the same investment pace
We’re likely to slow down our investment pace
It seems clear that “direct investments” are becoming a more important part
of the LP asset mix for nearly 40% of LPs.
10
1%
17%
21%
44%
17%
Source: Upfront Survey Jan 2016, 72 LPs.
How would you describe your fund’s position on
direct investments
We do some directs. It’s opportunistic.
Unlikely to ever be meaningful
Direct investments are the only reason we fund VC managers in the
first place
We never do direct and never will
We think direct is a very important
strategy for us
Doing more direct investments and this is
becoming an important part of our
strategy
Overwhelmingly LPs have been supportive of “opportunity funds” provided
they are done pragmatically and with favorable economics
11
3%
82%
15%
Source: Upfront Survey Jan 2016, 73 LPs.
How you would describe your fund’s outlook on
growth / overage / opportunity funds?
We only do core funds
We’ve been very active in the growth / overage /
opportunity fund
Done with a pragmatic approach &
favorable economics we’re favorable
While the market for Seed Funds grew enormously in the past 7 years, many
LPs still express some concerns about capacity and market crowding
12
23%
66%
11%
Source: Upfront Survey Jan 2016, 70 LPs.
What is your fund’s outlook on the seed market?
Seed delivers the highest potential returns and we’ll
continue to invest heavilyThere are too many seed funds and we’re worried they
won’t have enough capacity
We fund seed VCs but we’re very
discerning on which ones we’ll fund
Unsurprisingly half the market is looking for a balance of seed, A/B and
growth funds. 1/3rd focuses mostly on A/B
13
17%
50%
33%
Source: Upfront Survey Jan 2016, 72 LPs.
What is your fund’s outlook on traditional Series A/B
venture capital?
We prefer to focus on traditional A/B venture
We think traditional VCs are being squeezed
We want a healthy mix of seed funds,
A/B and growth VCs
Also it’s not too surprising that LPs are most cautious about growth stage
funds - in particular concerns about late-stage valuations
14
68%
32%
Source: Upfront Survey Jan 2016, 71 LPs.
What is your fund’s outlook on later stage venture
capital / growth equity?
We like growth stage but want a healthy balance of
seed, A/B and growth
We’re worried that the growth stage is
the most over-valued part of the market
73 LPs surveyed, part 1
15
Fund type
0
10
20
30
9
445
23
28
Fund size
0
10
20
$0-250M $250-750M $750M-1.5B $1.5-5B $5-10B $10B+ Blank
4
16
7
18
3
11
14
Which of the following best describes your focus on VC?
0
25
50
Only VC Mostly VC Very diverse Not much VC
2
42
10
19
Foundation or
Endowment
Fund of
Funds
Family
Office
Discretionary
Advisor
Insurance
Company
Other
Survey respondent geography
0
15
30
NorCal SoCal NE US Other US ROW Blank
2
4
28
11
6
22
Source: Upfront Survey Jan 2016.
73 LPs surveyed, part 2
16
Position
0
20
40
60
Partner / MD Analyst to Principal Blank
1
18
54
How long has your firm been investing in VC (years)
0
20
40
0-3 3-10 10-20 20+
1
23
30
16
3
How long has your firm existed (years)
0
20
40
0-3 3-10 10-20 20+
38
1614
5
Personal investment experience (years)
0
20
40
0-3 3-6 6-10 10-15 15+
27
23
15
44
Haven’t invested
much in VC
Source: Upfront Survey Jan 2016.
LP Outlook on Venture Capital 2016
17
LP Survey Data
@msuster

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Final upfront lp survey data 2016

  • 1. LP Outlook on Venture Capital 2016 1 LP Survey Data @msuster
  • 2. LP contributions to the VC industry is back to pre-recession highs (but still well below the 2000 peak) 2 US VC fundraising activity 0 65 130 195 260 $0 $15 $30 $45 $60 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Capital raised ($B) # of funds closed 237 258 193187 134 150 118 184178 193 162 $35$34 $20 $24$25 $19 $12 $33$34 $37 $22 162 193 178 184 118 150 134 187 193 258 237 Source: PitchBook 2015 Annual U.S. Venture Industry Report.
  • 3. 3 US VC funds annualized cash flow by year -$60 -$40 -$20 $0 $20 $40 $60 $80 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Contributions ($B) Distributions ($B) Net Cash Flow ($B) 17 -11 -5-5 -11 -18 -6-6 -13 -16 8 -11-11 34 26 30 24 19 1011 27 22 11 7 28 1011 -18 -27-29-28 -25 -21 -29 -33 -28 -24-23 -20-21-22 -11 -11 8 -16 -13 -6 -6 -18 -11 -5 -5 1 -1 17 Distributions haven’t made up for a decade of negative cashflows. Markups don’t pay the bills Source: PitchBook 3Q 2015 PE VC Benchmarking Report.
  • 4. The good news is that only 7% of LPs believe they will cut back on venture programs with 26% of funds looking to increase exposure 4 4% 22% 67% 7% Source: Upfront Survey Jan 2016, 73 LPs. How would you describe your fund’s current allocation to VC? About the right allocation Aggressively growing venture Too much allocated to venture Trying to grow our venture program
  • 5. 40% of LPs have a full bench, 40% looking to add, 20% looking to cut back 5 3% 38% 40% 19% Source: Upfront Survey Jan 2016, 73 LPs. How would you describe your fund’s current outlook on VC managers? Cutting back on managers Aggressively add new managers to our program Pragmatically add managers to our program Happy with our existing roster
  • 6. But LPs expressed caution, too. Nearly 75% of LPs have concerns about investment pace, valuation levels and burn rates of underlying companies 6 6% 68% 26% Source: Upfront Survey Jan 2016, 72 LPs. How would you describe your fund’s outlook on your existing (VC) managers activities? Very happy with investment activities of our existing managers Deeply concerned about the market behavior A bit concerned by pace, valuation creep and burn rates
  • 7. 61% of LPs believe that VCs are coming back to market to raise money at too quick of a pace - a reflection of anxieties of the over-funding of portfolios 7 61% 15% 24% Source: Upfront Survey Jan 2016, 72 LPs. How would you describe your fund’s outlook in your existing (VC) managers funding (and fund raising) pace? Managers come back at a normal cadence and it hasn’t changed much Managers have been coming back more quickly than in the past and we’re fine with this Managers have been coming back more quickly than in the past and it concerns us
  • 8. Even if some short-term concerns, 70% of LPs still bullish on VC as a great long-term asset 8 30% 69% 1% Source: Upfront Survey Jan 2016, 71 LPs. How would you describe your current views on venture capital overall? We’re even more bullish about VC than in the past We still think VC a great long-term asset class. At current levels, Venture Capital is starting to feel over-funded
  • 9. And 82% of LPs are likely to maintain their existing investment pace 9 10% 82% 8% Source: Upfront Survey Jan 2016, 73 LPs. How would you describe your likely investment pace in venture over the next 3 years? We’re likely to increase our investment pace We’re likely to keep the same investment pace We’re likely to slow down our investment pace
  • 10. It seems clear that “direct investments” are becoming a more important part of the LP asset mix for nearly 40% of LPs. 10 1% 17% 21% 44% 17% Source: Upfront Survey Jan 2016, 72 LPs. How would you describe your fund’s position on direct investments We do some directs. It’s opportunistic. Unlikely to ever be meaningful Direct investments are the only reason we fund VC managers in the first place We never do direct and never will We think direct is a very important strategy for us Doing more direct investments and this is becoming an important part of our strategy
  • 11. Overwhelmingly LPs have been supportive of “opportunity funds” provided they are done pragmatically and with favorable economics 11 3% 82% 15% Source: Upfront Survey Jan 2016, 73 LPs. How you would describe your fund’s outlook on growth / overage / opportunity funds? We only do core funds We’ve been very active in the growth / overage / opportunity fund Done with a pragmatic approach & favorable economics we’re favorable
  • 12. While the market for Seed Funds grew enormously in the past 7 years, many LPs still express some concerns about capacity and market crowding 12 23% 66% 11% Source: Upfront Survey Jan 2016, 70 LPs. What is your fund’s outlook on the seed market? Seed delivers the highest potential returns and we’ll continue to invest heavilyThere are too many seed funds and we’re worried they won’t have enough capacity We fund seed VCs but we’re very discerning on which ones we’ll fund
  • 13. Unsurprisingly half the market is looking for a balance of seed, A/B and growth funds. 1/3rd focuses mostly on A/B 13 17% 50% 33% Source: Upfront Survey Jan 2016, 72 LPs. What is your fund’s outlook on traditional Series A/B venture capital? We prefer to focus on traditional A/B venture We think traditional VCs are being squeezed We want a healthy mix of seed funds, A/B and growth VCs
  • 14. Also it’s not too surprising that LPs are most cautious about growth stage funds - in particular concerns about late-stage valuations 14 68% 32% Source: Upfront Survey Jan 2016, 71 LPs. What is your fund’s outlook on later stage venture capital / growth equity? We like growth stage but want a healthy balance of seed, A/B and growth We’re worried that the growth stage is the most over-valued part of the market
  • 15. 73 LPs surveyed, part 1 15 Fund type 0 10 20 30 9 445 23 28 Fund size 0 10 20 $0-250M $250-750M $750M-1.5B $1.5-5B $5-10B $10B+ Blank 4 16 7 18 3 11 14 Which of the following best describes your focus on VC? 0 25 50 Only VC Mostly VC Very diverse Not much VC 2 42 10 19 Foundation or Endowment Fund of Funds Family Office Discretionary Advisor Insurance Company Other Survey respondent geography 0 15 30 NorCal SoCal NE US Other US ROW Blank 2 4 28 11 6 22 Source: Upfront Survey Jan 2016.
  • 16. 73 LPs surveyed, part 2 16 Position 0 20 40 60 Partner / MD Analyst to Principal Blank 1 18 54 How long has your firm been investing in VC (years) 0 20 40 0-3 3-10 10-20 20+ 1 23 30 16 3 How long has your firm existed (years) 0 20 40 0-3 3-10 10-20 20+ 38 1614 5 Personal investment experience (years) 0 20 40 0-3 3-6 6-10 10-15 15+ 27 23 15 44 Haven’t invested much in VC Source: Upfront Survey Jan 2016.
  • 17. LP Outlook on Venture Capital 2016 17 LP Survey Data @msuster