- In a bullish venture-capital market, firms like Tiger Global have raised multibillion-dollar funds.
- The VC Wesley Chan says megafunds let firms make money on management fees, taking focus off returns.
- He says such “misaligned incentives” could spell trouble when the hot venture market cools.
It’s a boom time for venture capital. A frenzy of investing in young private companies has given rise to more than 400 new unicorns — startups valued at $1 billion or more — this year, already surpassing 2020’s total, according to Crunchbase.
Investors are so eager to get in on the action that VC firms are breaking records in fundraising, with $96 billion raised so far this year including 19 funds with $1 billion or more each — another record, according to Pitchbook’s quarterly report.
And yet, even among such riches, a few firms have raised truly jaw-dropping funds.
Tiger Global raised a new $8.8 billion fund earlier this year. Insight Partners closed $9.5 billion in 2020 and reportedly sought to raise another $12 billion this year. Andreessen Horowitz, also known as A16z, closed two funds totaling $4.5 billion in late 2020 and a multibillion-dollar crypto-focused fund this year, and it is said to be trying to raise another $6.5 billion. Sequoia closed a $7.2 billion fund in 2020.
Some VCs are starting to question whether such megafunds are a good thing. Among the critics is Wesley Chan, the managing director of Felicis Ventures who was previously a general partner at Google Ventures (now GV).
“There’s way too much money” in venture these days, Chan told Insider, adding: “I’d hate to be where Tiger Global is. And not just Tiger Global.” He pointed to massive funds for private investments run by Insight, Sequoia, A16z, and the hedge fund D1 Capital Partners.
Chan said firms with multibillion-dollar funds could generate so much money through management fees that they had less incentive to make their money on returns from successful investments, especially when such returns often take seven to 10 years to materialize.
He said that resulted in “misaligned incentives,” with big funds able to drive up the valuations in the startups they invest in and then raise new funds rather than build the startups into companies with solid revenue and growth.
“You have firms who do no diligence, who don’t take board seats, and who are willing to pay up because their incentive is to deploy capital and to raise another fund in 18 months and collect more management fees,” Chan said. While he didn’t point fingers, Tiger Global is known for not taking board seats, though founders it has backed also say it conducts extensive research into their companies beforehand.
“I don’t know if it’s wrecking venture capital, but it’s definitely not how I practice it,” he added.
Felicis manages $2 billion in assets in funds ranging from its first $4.5 million fund raised in 2006 to a $900 million fund raised this year, the firm says.
Chan has been around the block when it comes to game-changing tech and venture capital. He founded
Google Voice
and Google Analytics before becoming a general partner at GV. He wrote the first institutional check for Plaid and one of the first into Robinhood, and, by his count, has invested in 20 unicorns, including Canva, Guild Education, and Zipline. Insider named him No. 16 on its Seed 100 list of the best early-stage investors.
Despite his concerns, Chan acknowledges profiting from the frenzy.
“It’s hard for me to criticize it because all my companies have these amazing markups and unicorn status at high multiples,” he said. “I’m a beneficiary.”
Yet he also lived through the crash of 2008 and the dot-com bust two decades ago. He recalled seeing friends who had exercised their stock options early in startups face large tax liabilities when those companies folded.
“In fact, when I joined Google early on, I told them I didn’t want any stock options because I watched all my friends have to go into personal bankruptcy or do some other crazy stuff,” he said. Fortunately for him, the cofounder Larry Page talked him into accepting the options, which ultimately created wealth for him. He joined Google in 2002.
Still, he worries the next crash could be devastating for both employees and investors into venture funds — known as limited partners. He points out that his firm’s LPs are college endowments, foundations, and children’s hospitals.
Chan is particularly skeptical that multibillion-dollar funds can generate the returns that the best venture firms often provide: at least three times the original investment.
Ultimately, he warns, for every
bull market
, there’s a bear — and he’s treading cautiously as a result.
“I am worried for the founders and for the folks with money I manage,” he said. “I don’t want to be in a situation where when the music stops, I’m left without a chair.”
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