General Catalyst, one of Silicon Valley’s biggest venture capital firms, is preparing to launch a so-called “continuation fund” worth between $800 million and $1 billion, according to a person familiar with the plans.
A follow-on fund consists of a portion of the shares the VC firm owns in portfolio companies. With approximately $25 billion in assets under management as of 2023, the exact composition of General Catalyst’s portfolio of follow-on funds is still being determined. However, it will likely include stakes in Stripe, Gusto and Circle, the person said. The firm has recently engaged Jefferies as a secondary investment adviser.
Once the fund is established and investors have been found, General Catalyst’s initial shareholders will be presented with a choice: sell their shares and cash out, make room for new investors, or continue investing in the follow-on fund, a process known as a “rollover.” ‘
While private equity firms have used follow-on funds for a long time, the system has only recently grown in popularity among venture capitalists, largely due to a lack of IPOs and a slowdown in M&A activity. This has forced several large venture capital firms to use the secondary market to return capital to their limited companies.
For example, in July Bloomberg reported that NEA sold stakes in 11 portfolio companies, including Databricks and Plaid, to additional investors who collectively paid $540 million for the assets. Lightspeed is also currently in the process of selling a group of existing businesses valued at up to $1 billion to second-hand buyers.
Like NEA and Lightspeed, the General Catalyst follow-on fund will consist of late-stage startups whose value has increased since the company first invested in the assets.
General Catalyst did not respond to a request for comment.
The main benefit of a secondary fund, instead of selling the shares directly to another buyer in a secondary market transaction, is that it allows the mutual fund to continue to manage the shares and continue with the future benefits from them. Follow-on funds are also considered more founder-friendly than secondary sales of individual startup shares because they do not introduce new owners to a startup board. The same VC remains invested, albeit through a different fund.
Mutual funds have been more willing to sell in the secondary markets lately because some LPs are telling them they will limit their investments in the mutual fund’s next fund if they don’t get at least a cash return from their older investments.
While follow-on funds are generally a “win-win” for hedge funds, they may be a conundrum for certain limited companies. Since secondary shares sell at a significant discount to current valuations—typically 20% to 30% of current valuations—during stock sales, shareholders may not only be undercutting current valuations but also walking away from potential stock price growth.
Still, one of General Catalyst’s partners told TechCrunch that, given the lack of liquidity from venture capital investments, his pension fund will always prefer to cash in rather than roll into a follow-on fund.
As for when this LP will be offered this choice, the person did not say and it is not possible for TC to estimate. Futures funds are complex contracts that can take six months to a year to sell. This transaction can also fail entirely. Last year, Tiger Global tried to sell a type of secondary fund called a strip portfolio, which sells only a fraction of a stake in each company. But it couldn’t find a buyer willing to pay a price the company thought was fair, PitchBook said.
When Shasta Ventures earlier this year asked its shareholders to approve a follow-on fund priced at 35% of its book value, the company’s investors voted against the deal, Axios reported.
In April, the Financial Times reported that General Catalyst is approaching $6 billion in equity commitments for a new master fund. The new fund has not yet been announced. When TechCrunch asked for more information related to its fundraising activities last week, the company declined to comment.
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