Permanent Capital — Should VCs Learn To Stop Worrying And Love The Longer Roads?

Permanent Capital is an investment for an indefinite period of time in an underlying vehicle. It happens commonly in public equities, case in point Berkshire Hathaway which believes in buying and holding perhaps indefinitely. It’s anathema to venture capital which is essentially about investing with a 7–10-year horizon — but this has lately been changing, driven largely by the entrepreneurs.

The explosion of unicorns that have been staying private while continuing to raise more and more money is emblematic of the trend. Let’s analyze just the bumper crop of tech IPOs in 2019, where some of the biggest giants are expected to finally go public:

Taking an average, these companies have been around for 10 years ie at the very limit of what venture capital has historically optimized for. And most of them raised billion dollar rounds in their journey, sometimes when they arguably didn’t need the cash. Which brings us to three key questions.

1) Are we seeing the rise of a new type of venture capital?

There is no official name for it but suppose we call it mezzanine capital ie pay large amounts of cash for stakes at late stages. DST famously invested as such a decade ago, today the moniker is probably epitomized by Softbank with prominent names like Tiger Global and Fidelity following suit. And it is not just established large investors, emerging ones like Social Capital Hedosophia also considered this strategy, albeit in that case, they had huge bumps of their own. Whether we are seeing a new type of asset class emerging will largely depend on how these initial poster children of permanent venture perform this year, which brings us to the next question.

2) How do VCs adjust to startups remaining private much longer?

The data definitely suggests we are seeing a lengthening of the startup journey.

The caveat is IPOs are a single-digit fraction of successful exits and this data doesn’t cover M&A. That said, IPOs are disproportionately money makers which means the modus operandi of venture capital has to invariably shift. Funds who invest early, up to series B, can usually still sell their shares to other funds to get liquidity. But larger funds who come beyond series B may find themselves in a no man’s land where they have appreciations on paper but no disbursements to their LPs for much longer than before.

3) Will we see more evergreen funds?

Evergreen funds are those that get capital essentially as they need throughout their lifetime. You could consider long-standing corporate funds like Intel and Samsung evergreen since presumably the corporate commits enough funds regularly towards its fund activities. There are similar expressions of evergreen among hedge funds, banks or endowments that are sometimes funding mostly if not completely a VC fund. If permanent capital is here to stay we should indeed expect evergreen funds to do better since they will have more patient LPs. And indeed one data point reflecting this trend is the rise of CVCs in the last couple years.

These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). I would be stoked if they get people interested enough in a topic to explore in further depth. All opinions expressed here are my own. If this article had useful insights for you do give a like, any thoughts comment away.