Reports are growing that the financial crisis is hurting large investors that have traditionally sustained the venture capital industry.
Large institutions, such as pension funds, financial institutions (including some of the banks that are going bankrupt) and university endowments, give money to venture firms, which turn around and make bets on start-ups.
Increasingly, though, some of these institutions are to VC firms.
The result is that everyone needs money, fast. Hedge funds like Galleon, and Silicon Valley companies like electric car manufacturer Tesla and social network Facebook are all trying to raise money in the Middle East, according to sources. Meanwhile, many angel investors have disappeared and deal-making has slowed down to a feeble craw.
VC firms whenever they need more money to pump into their startups.
Capital calls are due when investors in venture funds have to make good on their promises to commit money to funds. Unlike hedge funds, venture funds don’t collect all of their money at once. They secure promises from limited partners — rich people, endowments, and pension funds — to wire money at certain intervals over a number of years.
However, rumors are circulating that Columbia University’s endowment fund is illiquid — that is, it can’t raise the cash it needs to fund current commitments. Harvard, meanwhile, is reportedly trying to sell a third of its private equity portfolio at a steep discount in a “secondary offering.”
We’ve called Columbia for comment.
We’ve heard from other solid sources that Harvard is indeed selling some of its private equity positions in the secondary market. Others are too. California’s largest pension fund, CalPERS, for one, has had issues, and we’re investigating this to get more details.
This may be more serious than some realize, even with the gloom already out there. We just heard of a Silicon Valley company that couldn’t raise a round because one of its VC backers attempted a capital call, but the firm’s investors couldn’t make the call.
Hans Swildens, of Industry Ventures, a firm that specializes in helping take over commitments that LPs can’t make, says:
“We’re starting to also see all the later stage companies miss Q3 numbers and guiding down for Q4 and 2009, that makes the company’s CEO/CFOs rebudget, do layoffs to adjust expenses and also has growth impacts (not investing for growth, but hunkering down). This will make valuations drop.”