With liquidity rare, VCs may get creative to return investor cash

Welcome to the very last issue of The Exchange! With TechCrunch+ sunsetting this month, The Exchange column and its newsletter are also coming to an end. Thank you for reading, emailing, tweeting, and hanging out with us for so many years.

P.S. A special thanks from myself to Anna, who was nothing short of a brilliant lead author for this newsletter since taking it over. She deserves endless credit for her work on the email.

Today on The Exchange, we’re digging into continuation funds, counting down through some of our favorite historical Exchange entries, and discussing what we’re excited to report on for the rest of the year! — Alex

Continuation funds

Continuation seemed like an apt theme from our perspective. It is also a very topical one: “The greatest source of liquidity now is going to be continuation funds,” VC Roger Ehrenberg predicted in a recent episode of the 20VC podcast.

In case you aren’t familiar with the term, let’s turn to the FT for a definition:

Continuation funds, which are common in private equity [PE] but rare in venture capital, are a secondary investment vehicle that allows them to “reset the clock” for several years on some assets in old funds by selling them to a new vehicle that they also control. This helps a VC fund’s backers, known as “limited partners,” to roll over their investment or exit.

If you have been following the last few months of venture capital activity, the “why now?” is easy to answer. As the StepStone Ventures team told our colleague Becca Szkutak in her December 2023 investor survey: “With portfolios awash in unrealized value, fewer immediate exit opportunities, and longer hold periods on the horizon, GPs are beginning to get creative in order to generate liquidity.”

In practice, a continuation fund sees new investors invest in existing portfolios, but “it reflects today’s valuations,” Ehrenberg said. This repricing and the potential conflict of interest around it sound challenging in theory, but Ehrenberg doesn’t think so. “You have net new investors looking at a portfolio, so they’re the price setter, not the existing manager.”

It’s not just very large funds like Insight Partners and Lightspeed that can explore this option, either. “It’s a viable strategy for a decent swath of the venture industry,” Ehrenberg told 20VC host Harry Stebbings.

Whether it’s continuation funds, strip sales or secondaries, there’s a clear impetus for VC to look for solutions to its often ill-timed cycles, as we had already seen with the rise of permanent capital and publicly listed funds. A common thread in today’s economy is that projects and companies aren’t given the time they need to fully succeed, so even if it supposes a temporary discount, it’s good to hear that net investors are prepared to give portfolios more time to shine.

RIP The Exchange

The Exchange began its life in late 2019, before it even had a name. It quickly became a daily column during the week, and later this weekend newsletter. For those of you interested in the historical quirks of building media products, The Exchange was a TechCrunch+ product on the site, but its weekend issue was sent out for free as an email. Why was that the case? Because at the time we didn’t have the internal tech to send out subscriber-only emails!

Over the life of The Exchange on TechCrunch+ we shipped more than 1,000 columns and newsletters, making it the largest and — if we may — most impactful single project for driving subscribers to what was our paid product. The Exchange and TC+ were inseparable, so it makes sense that they are being retired together. Still, as with any project that mixed both work and personal passion, we’ll miss it.

From its start, the $100 million ARR club and the early pandemic days replete with stock market collapses and fear, The Exchange was around to chronicle the 2020–2022 startup boom, and its later conclusion. We went from tallying monster rounds and a blizzard of IPOs to watching venture capital dry up and startup exits become rarer than gold. It’s been wild.

Anna took over The Exchange’s newsletter in early 2022, around the time that Alex became editor-in-chief of TechCrunch+. The columns continued to be a group project, but we had to divide and conquer to keep our output at full tilt.

Below is a list of some of our favorite Exchange entries. Of course, we couldn’t go back through the entire archive — which you can find here — so consider this a partial download of the hits:

• The $100M ARR Club (December 2019). The start of a long-running series looking into pre-IPO startups. A bunch of the entrants like Monday.com later went public.
• Why is everyone making OKR software? (January 2020). Our first “startup cluster” style post, digging into what we found to be an unusually busy segment of upstart tech company effort.
• API startups are so hot right now (May 2020). API startups would stay hot for years to come, leaning on the model that Twilio helped pioneer. It’s interesting to think back to May of 2020, when there was still ample fear in the market. Little did we know what was coming next.
• Don’t hate on low-code and no-code (May 2020). The low, no-code debates have quieted somewhat as the method of creating software that non-developers manipulate and bend to their own will has become more table stakes than controversial product choice. Still, it wasn’t always that way.
• Startups have never had it so good (July 2021). By mid-2021, it was clear that the market for startup shares was in a new era, with investors piling cash into every software company that moved.
• How to make the math work for today’s sky-high startup valuations (July 2021). Underpinning the massive funding boom that we noted before was an expectation that software growth was going to be faster, and last longer than previously expected. That wound up not being true.
• What could stop the startup boom? (September 2021). We were a little concerned in later 2021 that the pace of investment was not entirely sustainable. The market would stay hot for a while longer, but our notes about potential disruptors to the startup boom wound up being reasonably accurate. Interest rates really did change the game.
• More LP transparency is overdue (January 2022). VCs will tell you what they invest in but are often more tight-lipped about their own backers. We argued that startup founders are due a bit more information on where their capital is ultimately coming from.
• Why you shouldn’t ignore Europe’s deep tech boom (February 2022). One interesting narrative forming in recent quarters is Europe’s venture and startup resilience during the present slowdown in private-market capital investment. We said that European deep tech was poised to do well. And, well, we were right.
• Yes, it’s become harder for startups to raise funding (July 2022). By mid-2022, it was clear that the boom times were over, despite 2021’s exuberance stretching into early 2022.
• The rise of platform engineering, an opportunity for startups (December 2022). Instead of investing in more developers, why not spend to help them be more productive? Later cuts to developer payrolls made it clear that the era of mass-hiring was behind us, making the thesis here all the more pertinent.
• The mirage of dry powder (January 2023). After a lackluster end to 2022, the optimistic take was that VCs had lots of dry powder — capital to put to work — that they were sitting on. Surely those funds would shake loose and bring back the good times? Anna argued that some of the venture capital theoretically sitting on the sidelines was less “real” than it looked.
• A core plank of the SaaS economic model is under extreme pressure (August 2023). One way that software companies grow is by selling more of their service to customers over time. However, by last August it was clear that net retention was suffering, meaning that a lot of organic growth that startups might have once counted on was evaporating.
• Will the power of data in the Al era leave startups at a disadvantage? (August 2023). If AI is data brought to life, then do the companies with the most data win the day? And if so, where does that leave startups?
• Rainbow or storm? (September 2023). After discussing improving fintech results, Anna dug into the use of AI to fight fraud. It was an interesting turnabout of the usual AI and fraud narrative, which involves AI bolstering fraudulent activity instead of limiting it.
• Klarna’s financial glow-up is my favorite story in tech right now (November 2023). After seeing its valuation slashed, Klarna didn’t slow down and instead kept growing and improving its financial performance. Alex gave them a big thumbs-up for progress made.
• WeWork’s bankruptcy is proof that its core business never actually worked (November 2023). What more can we say about WeWork other than that it was a weird leasing arbitrage play that never had a very good core business.
• Why I’m modestly crypto-bullish in 2024 (January 2024). Ahead of spot bitcoin ETFs, this column indicated that this year could be a fecund one for crypto as a whole. So far, so correct.
• Yes, the tech layoff surge you are feeling is real (January 2024). And to close out some of our favorite, or most memorable entries, the recent layoff wave has been anything but a mirage. Sadly.

We’re not done

While The Exchange is shuttering, we still have big plans for coverage this year. Thankfully we’re both still at TechCrunch, so you are far from rid of us. Alex wants to work on unicorn health, the state of debt financing in 2024, and how AI will find purchase at the OS layer. Anna is curious about AI hubs beyond San Francisco, GP stakes investing and whichever S-1 we can get our hands on.

Thanks again for reading The Exchange’s post and newsletter. We’re so very grateful to have gotten to spend so much time with you on this project. Onward and upward!