Thread by @Beezer232

Best wishes for 2022 everyone! 🎉

As we enter the new year, I wanted to share a bit of LP perspective.

We all know the venture market was on 🔥 in 2021, but how is that actually manifesting and what does that mean for how the proverbial table is being set for 2022?

Here’s what us LPs are seeing and some of the questions LPs are asking themselves going into 2022.

#OpenLP

1 - The average capital called in the 1st year of a fund is accelerating rapidly.

In 2021, our portfolio averaged 33% in terms of capital called in a fund’s first year, which implies an initial investment period well below two years.

This is new.

And what that means for LPs/venture industry still remains to be seen.

Open questions abound on the value of time diversity in a portfolio vs not ‘playing the game on the field’.

Classic article on this topic from @bgurley: abovethecrowd.com/2014/01/24/on-…

Another interesting question (that @Lux_Capital touches on in their excellent quarterly LP letter)...

What if LPs get indigestion??? I haven’t seen many signs of this yet, but given the pace of fundraising it's something we are keeping an eye out for.

https://twitter.com/wolfejosh/status/1459713710348460033?s=20

2 - Future LP indigestion notwithstanding, there are still mountains of dry powder ready to pour into venture in 2022 ($900B to be exact, says the @WSJ).

So it's hard to see any near term slow down in startup fundraising or competition for term sheets.

wsj.com/articles/the-9…

3 - Why? Because money seeking alpha has been looking to venture thanks to some recent pretty eye popping returns.

More here on recent fund vintage performance benchmarks:

https://twitter.com/Beezer232/status/1455578162713137153

Lots of reasons for this… the rapid digitization of industries thanks in no small part to year 2 of the pandemic, a robust public market (IPO and to a lesser extent SPACs), M&A, crypto driving fast valuation/liquidity, low interest rates (for now)… just to name a few.

4 - And about that IPO market… despite an EoY pullback on tech stocks, 2021 saw 55 software IPOs with at least a $175M market cap (excluding SPACs).

This trounces what we’ve seen in the past.

And (along with IPOs in 2020 coming off lock up in 2021) created significant amounts of liquidity for LPs, GPs, and entrepreneurs alike.

Liquidity is a critical component of the venture market.

It keeps everything moving forward by providing (among other things) the $$$ LPs use to re-invest in venture funds.

5 - Which brings us back to where LPs put their $$$ in 2021 and what that might tell us about this upcoming year and the choices LPs may make.

While the final numbers are still being true’d up, all signs point to $100BN+ being raised by venture funds in 2021, making it *the most money raised by US venture funds in a single year.*

Ever.

Wow.

Of this $100BN+...

Capital continues to concentrate into fewer funds overall thanks to outsized funds (funds that raise $1BN+). 2021 had many… about 20 $1BN+ funds raised.

Not surprisingly then, established funds continue to make up the majority of funds that raised in 2021.

Not all funds raised were mega funds, however.

2021 saw the continued rise of solo GPs, rolling funds, syndicate funds, and funds focused on new (er) themes like underrepresented founders, crypto, climate, and impact-oriented funds.

More here: bit.ly/34f3Eku

6 - All of this makes for a fascinating set of questions in front of LPs for 2022. No one knows if all will continue to be “up and to the right,” but the importance and power of tech-enabled companies is undeniable.

Big picture question: Where will LPs choose to invest in 2022?

Will they re-invest in existing managers that have produced strong returns despite (or because of?) ever increasing fund sizes?

Or will LPs look to access new markets/networks/perspectives/go-to-market strategies... (and smaller funds sizes)... by focusing on emerging managers?

And how real will LP indigestion become?

It could very well slow down fundraising for some, if not all, funds.

Many important questions still swirling about in today’s juiced up venture market… Hello 2022!