Common Catalyst, considered one of Silicon Valley’s largest capital corporations, is gearing as much as launch what’s often called a “continuation fund” value between $800 million and $1 billion, in line with an individual aware of the plans.
A continuation fund consists of a portion of stakes that the VC agency has in portfolio firms. With round $25 billion in belongings underneath administration as of 2023, Common Catalyst’s precise continuation fund portfolio composition continues to be being decided. Nevertheless, it’s going to probably embrace stakes in Stripe, Gusto and Circle, the individual stated. The agency has lately employed Jefferies as its secondary funding advisor.
As soon as the fund is established and traders are discovered for it, Common Catalyst’s unique restricted companions will likely be supplied a alternative: promote their shares and money out, making means for brand new traders, or keep invested within the continuation fund, a course of known as ‘rolling.’
Whereas personal fairness corporations have used continuation funds for a very long time, the mechanism has solely lately grown in recognition with enterprise capitalists, largely due to the dearth of IPOs and slowdown in M&A exercise. This has pressured some giant enterprise capital corporations to faucet the secondary market to return capital to their restricted companions.
As an example, In July, Bloomberg reported that NEA bought stakes in 11 portfolio firms, together with Databricks and Plaid, to secondary traders who collectively paid $540 million for the belongings. Lightspeed can be now within the technique of promoting a bunch of current firms value as a lot as $1 billion to secondhand patrons.
Like NEA and Lightspeed, the Common Catalyst continuation fund will encompass late-stage startups whose values have appreciated because the agency first invested within the belongings.
Common Catalyst didn’t reply to a request for remark.
The first advantage of a continuation fund, versus merely promoting the shares outright to a different purchaser in a secondary market transaction, is that it permits VCs to proceed to handle the shares, retaining any future upside of them. Continuation funds are additionally thought of extra founder pleasant than secondary gross sales of shares of particular person startups as a result of they don’t introduce new homeowners to a startups’ cap desk. The identical VC stays invested, albeit via a special fund.
VCs have been extra prepared to promote within the secondary markets lately as a result of some LPs are telling them that they may restrict their investments within the VC’s subsequent fund in the event that they don’t obtain at the very least some money returns from their older investments.
Though continuation funds are usually a “win-win” for enterprise funds, they might be a conundrum for sure restricted companions. Since secondaries promote at a considerable low cost to present valuations—usually 20% to 30% off present valuations—when promoting shares, restricted companions might not not solely be taking a haircut on current valuations but in addition strolling away from potential share worth progress.
Nonetheless, considered one of Common Catalyst’s restricted companions advised TechCrunch that, given the dearth of liquidity from enterprise capital investments, his pension fund will all the time elect to money in fairly than roll right into a continuation fund.
As for when this LP will likely be supplied this alternative, the individual didn’t say, and it isn’t doable for TC to estimate. Continuation funds are advanced offers that may take six months to a yr to promote. These transactions also can fail totally. Final yr, Tiger World tried to promote a sort of a continuation fund known as a strip portfolio, which sells solely a portion of stakes in every firm. But it surely couldn’t discover a purchaser prepared to pay a worth that the agency thought was truthful, PitchBook reported.
When earlier this yr, Shasta Ventures requested its restricted companions to approve a continuation fund that was priced 35% off its carrying worth, the agency’s traders voted towards the deal, Axios reported.
In April, Monetary Occasions reported that Common Catalyst is nearing $6 billion in capital commitments for a brand new main fund.The brand new fund nonetheless hasn’t been introduced. When TechCrunch requested for extra info associated to its fundraising actions final week, the agency declined to remark.