Cendana, Kline Hill have a contemporary $105M to purchase stakes in seed VC funds from LPs trying to promote

In the event you ask buyers to call the largest problem for enterprise capital at this time, you’ll seemingly get a near-unanimous reply: lack of liquidity.

Regardless of investing in startups or VC funds that elevated in worth, because of the dearth of IPOs, these bets usually are not producing a lot, if any, money for his or her backers. That’s the disadvantage of personal funding versus the general public market. Shares of firms in personal firms like startups can’t be offered at will. The businesses should authorize their current buyers to promote their shares to accepted others, generally known as secondary gross sales.

Money-hungry enterprise buyers, whether or not VCs themselves or their restricted companions, are more and more trying to promote their illiquid positions to secondary consumers. 

Now, add in that many early-stage startups have been overvalued in the course of the fundraising frenzy that peaked in 2021 and that these shares might now be price much less. That presents a brand new and distinctive alternative to purchase stakes in seed-stage VC funds, in addition to shares in startups, at relative bargains.

At the moment, Cendana Capital, a fund of funds that invests in dozens of seed-stage venture firms, and accomplice Kline Hill Partners, a agency targeted on shopping for small beforehand owned personal belongings, are asserting a brand new $105 million Kline Hill Cendana Companions fund, which is nicely above the $75 million goal they initially hoped to boost.

“Over the past two years, we’ve been hearing from our portfolio funds, ‘We have a family office that wants to sell their $2 million commitment. Would you be interested in buying it?’” stated Michael Kim, founder and managing director of Cendana Capital.

Kim felt the chance to extend his agency’s possession in enterprise funds and promising startups at a considerable low cost was too good to cross up. However, since investing in secondary belongings requires experience that none of Cendana’s buyers had, he determined to affix forces with Kline Hill.

Elevating cash for this fund was simple, Kim stated. Cendana’s restricted companions have been asking Kim to reap the benefits of this purchaser’s market.

“We simply passed the hat around to our existing LPs at Kline Hill and Cendana,” stated Kim.

Shopping for stakes in seed funds

Michael Kim, founder and managing director of Cendana Capital. Picture Credit: Michael Kim

What units Kline Hill/Cendana’s investing car aside is that it’s shopping for secondary curiosity in seed-stage corporations and particular person firms from seed funds. Most current secondary gamers are too massive to go after this chance, based on Kim.

It’s arduous to not see the symbiosis between the 2 corporations. Cendana’s relationships with its portfolio funds, together with Lerer Hippeau, Forerunner Ventures and Bowery Capital, are serving to it take the lead on sourcing secondary offers. It then passes these alternatives to Kline Hill, which values, underwrites and negotiates the transaction worth.

Whereas Kline Hill has been investing in secondary VC for the reason that agency’s founding in 2015, Chris Bull, a managing director on the agency, stated that partnering with Cendana brings the kind of data that’s extraordinarily helpful to the funding course of.

“What’s most exciting for us is we’re able to get transactions done where I think either of us individually would have had difficulty getting across the line,” Bull stated.

The present plan is to take a position the entire $105 million fund by the top of 2024. The 2 corporations are giving this three way partnership a strive, and if it goes nicely, they’ll increase a successor fund subsequent 12 months.

The 2 corporations usually are not alone in noticing a big alternative in scooping up beforehand owned enterprise stakes. Conventional secondary buyers, akin to Lexington Partners and Blackstone, not too long ago raised their largest secondary funds ever. Whereas these autos goal all sorts of personal belongings, buyers say a portion of that capital is certain to go to enterprise. As well as, Industry Ventures has picked up an almost $1.5 billion fund devoted to secondhand VC. 

However billion-dollar funds like these “typically focus on much, much larger, more multistage firms,” Kim stated. Making use of such huge finance techniques to the seed stage is way much less prevalent. 

Kline Hill/Cendana is on to one thing. With VC-backed firms tending to remain personal longer than their buyers’ 10-year fund cycles, the necessity for liquidity will seemingly solely proceed to develop.