Sources say General Catalyst is working on a “follow-on” fund worth up to $1 billion

General Catalyst, certainly one of Silicon Valley’s largest enterprise capital firms, is preparing to launch a so-called “follow-on fund” worth between $800 million and $1 billion, according to a person conversant in the plans.

The follow-on fund consists of a portion of the shares that the VC firm holds in portfolio firms. From approx $25 billion by way of assets under management for 2023, the precise composition of General Catalyst’s follow-on fund portfolio is still being determined. However, it’s going to likely take stakes in Stripe, Gusto and Circle, the person added. The company recently hired Jefferies as a further investment advisor.

Once the fund is created and investors are found for it, General Catalyst’s original limited partners could have a alternative: sell their shares and money out, making room for brand new investors, or remain invested within the follow-on fund (a process called “rolling”). ‘

Although private equity firms have long used follow-on funds, this mechanism has only recently gained popularity amongst enterprise capitalists, largely due to the low variety of IPOs and slowing M&A activity. This has forced some large enterprise capital firms to use the secondary market to return capital to their limited partners.

In July, for instance, Bloomberg reported that NEA sold shares in 11 portfolio firms, including Databricks and Plaid, to secondary investors who collectively paid $540 million for assets. Lightspeed is currently within the technique of selling a group of existing businesses valued at as much as $1 billion to used buyers.

Like NEA and Lightspeed, General Catalyst’s follow-on fund will consist of late-stage startups which have increased in value for the reason that company first invested within the asset.

General Catalyst didn’t respond to a request for comment.

The primary advantage of a follow-on fund, as opposed to simply selling the shares to one other buyer in a secondary market transaction, is that it allows VC investors to proceed to manage the shares while retaining any future advantages from them. Follow-on funds are also considered more founder-friendly than secondary sales of shares of individual startups because they don’t introduce latest owners into the startup capitalization table. The same VC fund stays invested, albeit through a different fund.

VC funds have been more willing to sell on secondary markets currently as some LPs tell them they’ll reduce on their investments in one other VC fund in the event that they don’t receive at the least a few of the money returns on older investments.

While follow-on funds are generally useful to enterprise capital funds, they will pose a conundrum for some limited partners. Because secondary partnerships sell stock at a significant discount to current valuations – typically 20% to 30% from current valuations – when selling shares, limited partners cannot only take a haircut to existing valuations, but additionally forgo potential increases in stock prices.

Still, one General Catalyst limited partner told TechCrunch that given the shortage of liquidity from enterprise capital investments, his pension fund would at all times select to money out reasonably than move into a follow-on fund.

The person didn’t say when this LP would receive this chance, and Top Contributor is unable to estimate this. Follow-on funds are complex transactions that may take anywhere from six months to a 12 months to sell. These transactions may additionally fail completely. Last 12 months, Tiger Global tried to sell a sort of follow-on fund called a strip portfolio, which sells only a portion of its holdings in each company. However, it couldn’t find a buyer willing to pay a price that the corporate considered fair, PitchBook reported.

When Shasta Ventures asked its limited partners earlier this 12 months to approve a follow-on fund that was valued at 35% below carrying value, the corporate’s investors voted against the deal, – Axios reported.
In April, the Financial Times reported that General Catalyst would commit capital worth almost $6 billion to the brand new core fund. The latest fund has still not been announced. When TechCrunch asked for more details about its fundraising efforts last week, the corporate declined to comment.