Mar 3, 2023 - Economy

Scoop: Founders Fund slashes size of its flagship VC fund

Illustration of hand holding offering a bag of money to another hand, which is refusing the offer.

Illustration: Rae Cook/Axios

Founders Fund has quietly cut the size of its eighth venture capital fund in half, from around $1.8 billion to around $900 million, Axios has learned from multiple sources.

Why it matters: This is a shot across the VC industry's bow by firm founder Peter Thiel, and will force peers to explain why they're not doing the same. It also puts added pressure on firms that currently are in market.

Details: This isn't a pure fund size reduction. Instead, the "extra" $1 billion will be pushed into a ninth venture capital fund that will activate whenever Fund VIII is fully committed (at which point management fees will kick in).

  • But that could be a while, given that Fund VIII still hasn't begun deploying capital (that's expected to happen at the beginning of Q2).
  • Founders Fund is not reducing the $3.4 billion size of its second growth fund, which it raised simultaneous to its flagship. There had been some talk about doing so, including during a group call with investors, but it didn't come to pass.

The big picture: Multiple sources say the firm's argument is that Fund VIII was raised just prior to the tech market correction, which could persist for years. If deal volume and prices decrease, then so should VC fund size.

  • A counterargument is that the correction will cause companies to stay private longer — fewer exit opportunities via IPO or M&A — and thus require more capital, not less.
  • Founders Fund would reply that such excess can be sopped up by the growth fund, which remains flush with cash (maybe a bit less flush if it invests in the big Stripe round).
  • The firm declined to comment.

Back to the future: VC fund size cuts are unusual, but not unique.

  • The first one was done by Mohr Davidow Ventures in 2002, at the dawn of the dotcom crash. It soon would be followed by cuts of varying sizes, usually between 25% and 50%, by such firms as Kleiner Perkins, Battery Ventures, CRV and Redpoint Ventures.
  • Accel in 2002 tried to do the split structure now being employed by Founders Fund, but ran into some LP resistance and ultimately opted to implement a 32% cut on its $1.6 billion eighth fund (the ninth one would cut an early check for Facebook).
  • Some of you also might also remember that Crosspoint Venture Partners raised $1.2 billion for a fund in 2021 and then gave all of it back.

Fast forward: One big difference between 2002 and 2023 is the size of venture capital firms themselves.

  • Many modern shops rely on deep management fee streams to pay their legions of junior investors and support staff. Cutting fund size could precipitate layoffs or salary reductions.
  • Founders Fund, on the other hand, is relatively lean with just around 30 total employees. That said, not everyone inside the firm was initially supportive of cutting the VC fund size, which was proposed by Thiel.

The bottom line: Thiel has decided that venture capital is due for a slimdown, and is pulling his money where his mouth is.

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