There has been a recent trend in venture capital of increased asset valuations alongside loftier fundraising targets for managers; in Preqin’s H1 2018 Venture Capital Fund Manager Outlook, 55% of GPs reported higher pricing for portfolio companies than in June 2017. Alongside this, 98% of managers have seen the level of competition for transactions remain steady or increase over the past year, resulting in difficulty to find accurately priced investment opportunities. This jockeying for assets among fund managers has led to an “arms race”, which sees fund managers needing to raise the most capital possible in order to outbid the competition for attractive portfolio companies.
Softbank Vision Fund, with a current value of $93bn and a target of $100bn, is the largest tech investor in the world. The fund has utilized the strategy laid out above to make numerous venture capital investments globally. Softbank Vision Fund has the ability to invest $1.0bn in a single funding round, as seen with Flipkart, WeWork and Uber, among others. The strategy has trickled down to other large venture capital firms in the industry as fund target size continues to increase.
General Catalyst Partners, a venture capital firm that makes investments in innovative North American companies, raised $1.4bn for its largest ever fund, General Catalyst Group IX. The fund closed in March 2018, exceeding its target of $1.0bn and significantly surpassing the $660mn the firm raised for its previous fund. Additionally, Sequoia Capital is targeting $5.0bn for its newest fund, Sequoia Capital Global Growth Fund III, which is 2.5x the size of the previous fund in the series. Last year also saw New Enterprise Associates (NEA), Institutional Venture Partners (IVP), Canaan Partners, Clarus Ventures and Flagship Pioneering each raise the largest funds in their combined 141 year history.
Of the 100 largest venture capital deals tracked by Preqin overall, 85% occurred from 2015-2018 YTD. This trend is reflected throughout the industry, with both mean and median venture capital fund sizes trending upwards over the last 10 years. In 2013, the average venture capital fund size was $84mn, and in the five years since then the average fund size has been $128mn, hitting a peak of $140mn in 2016. So far in 2018, the median fund size is $60mn, 38% higher than 2013 and nearly double what it was in 2009.
2018 will likely continue the trend of growing fund sizes, as asset valuations show no sign of steadying. Along with the aforementioned Sequoia Capital fund, there are currently eight venture capital funds in market seeking upwards of $1.0bn, including Next Orbit Ventures Fund II ($2.0bn) and NovaQuest Pharma Opportunities Fund V, which is targeting $1.5bn to make investments in the pharmaceutical and medical sectors. Although these funds are nowhere near the size of the Softbank Vision Fund, their presence points to a continued need for managers to raise increasing amounts of capital in order to compete for assets.