It might be the dog days of summer, but winter is coming for venture capital.
Union Square Ventures, historically considered one of the top-performing venture firms, marked down the value of seven of its funds by nearly 26% this year, writes Ben Bergman.
The data comes from investment returns Ben obtained for Utimco, the investment firm that manages the $65 billion endowments of the University of Texas and Texas A&M systems. The firm's investments in USV funds went from being valued at $201 million at the end of February to $149 million by the end of May.
At first glance, it might appear as if Union Square Ventures has simply made some bad bets. Other venture holdings in Utimco's portfolio — Sequoia Capital, Y Combinator, and GGV Capital — remained mostly unchanged.
USV has had a pretty incredible track record with Utimco, delivering a nearly 60% annual return (excluding fees), but nothing lasts forever. Past performance is not indicative of future results, as the old saying goes.
But the returns could also be a glimpse into the pain that's set to hit the wider VC market.
Venture firms are required to value their holdings, but there is plenty of wiggle room. Shares in startups aren't regularly traded — as with a public company — so there's plenty of room for discretion.
So while VCs were happy to update valuations when business was booming in 2020 and 2021, they're probably less enthusiastic to make adjustments now that the tech market has largely tanked.
Which brings us back to USV. Since the firm has largely outperformed the wider market over the years, "they aren't really terribly worried about writing down unrealized gains," one Bay Area VC told Ben.
However, funds that haven't delivered the same eye-popping returns to investors may not be as keen to mark down funds.
Of course, one can play that game for only so long. Insiders have already warned an "extinction event" is on the horizon for startups. If companies start going under, VCs will have no choice but to adjust valuations. But at that point, their investors might feel blindsided.
So VCs are left with a choice: Get ahead of the bad news early by taking a more realistic look at their holdings, or hope the sky-high valuations of just a few years ago can make their return, however implausible that may seem.
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