A topic that’s been on my mind a lot in 2019 is “time diversity” in venture capital funds. There’s more about this topic all over the web, but the basic gist is — when building a VC portfolio, many investors prefer to have some “time diversity” baked into the mix because 1) prices can fluctuate and a longer time period can increase the odds that a portfolio is built when prices are lower and 2) it can help the investors “pace” their initial capital deployment and reduce the risk of investing too quickly and too loosely.
From what I’ve gathered from LPs and VC mentors, in previous eras, the initial deployment period of a VC fund (not including reserves for follow-ons, etc.) used to be around 5 years. Today, it’s rare to find a 5-year fund. I know of one. I can name a few 4-year funds on one hand. Three years seems to be a standard and acceptable period today. That said, some of the very best funds are doing two-year fund cycles. These are firms that have returned capital at scale.
This topic can trigger some heated debate. There are valid points on both sides. For those firms which have a strong foundation and history of returns, one could argue they’ve earned the right to judge the investment climate and march forward. On top of this, technology is no longer a vertical sector — it is entirely horizontal and spreading outward into global markets and new industries. On the other hand, those portfolios may not catch lower prices in certain vintages or potentially be investing so quickly, the bar for what makes an investment could go down. And, the more funds that are raised, the more fees VCs can collect, which are contractually guaranteed in limited partner agreements.Only time will tell which approach is best or optimal.
When I started Haystack, I had no idea about any of this. I only learned about this as a concept maybe in 2017. I’d speculate that most VCs actually don’t think about this topic. So, I spent years trying to learn from other VCs. Here are the initial deployment periods for the Haystack franchise: Fund I (1.5 years); Fund II (1 year); Fund III (2 years); Fund IV (2 years); now just opened Fund V (targeting 2.5-3 years).
What I learned from talking to mentors — mainly would single out Mike Maples here, who really hammered on this topic with me, as well as Fred Wilson and Roger Ehrenberg — is that for me as an investor, pushing the fund to increase time diversity would be a good thing. That doesn’t mean Haystack needs to be a 4-year fund or longer, but it also doesn’t mean that what’s best for me is what others should do. I think the key point is — folks managing third-party capital should go on their own journey to learn this topic and figure out what the best flight plan is for their own fund and LPs. Like portfolio construction, simply the act of thinking deeply about it, coming up with a plan, and sticking to it has been very valuable to me and something I think about now daily.