Apr 18, 2024 - Business

Shasta Ventures seeks investor approval of a continuation fund

Illustration of one hundred dollar bills on a street name sign.

Illustration: Lindsey Bailey/Axios

Limited partners in Silicon Valley venture firm Shasta Ventures have until the end of Monday to decide whether to approve a continuation fund, Axios has learned.

Why it matters: More VCs may try to to follow a similar path as the dearth of exits continues, and firms struggle to raise new funds (as Shasta hasn't since 2017).

What's happening: Shasta needs two-thirds approval to move nearly all holdings of its fifth (and last) fund into a continuation vehicle priced at about $562 million, or 65% of its 2023 Q3 valuation.

  • Investment firm StepStone is the lead investor for the new fund, and will purchase any sellers' equity plus contribute additional cash for follow-on investments.
  • The voting form only offers LPs the option to sell or roll into the continuation form, with the ability to commit additional capital.
  • The proposal requires that LPs consent to moving existing assets to the continuation fund in order to roll their equity into it. That is, they can't be investors in the new fund unless they vote to support it— something that was part of Shasta's bargain with StepStone. This has raised questions from LPs.

Flashback: Fundraising for Shasta's sixth fund fell apart following general partner departures and shifting investment strategies. Jason Pressman is the only remaining partner.

  • Shasta has since tried to raise new funds, but has been unsuccessful. LPs have also denied requests for additional fees from existing funds.

Zoom in: The proposed continuation fund's management fees would be 1% annually, with a maximum of about $5 million per year. The aggregate fees are about $15 million more than the original fund would pay if it continued on.

  • The transaction costs would be about $10 million, to be paid by the existing fund's investors.
  • The new fund's carried interest is initially 10% and could increase to up to 25% based on performance (the original fund is set at 20%).

By the numbers: Pet food company Farmers' Dog makes up 40% of the fund's assets, with other potential wins like HR software maker Lattice and sales software startup Highspot also in the portfolio.

What they're saying: "We don't think this is in the best interest of the limited partners," a Shasta LP tells Axios.

  • The timing — only seven year's into the fund's 10-year life — is also raising questions among investors.

The other side: According to a source familiar with the transaction, Shasta's pitch to investors is that the continuation fund is an opportunity for liquidity to LPs, with price certainty.

  • It also provides a longer horizon of active management to the portfolio companies, many of which are early-stage startups that are many years away from exiting.
  • And should the continuation fund not get approved, the original fund will have to get wound down, potentially fetching less value for the assets.

The bottom line: For LPs, it comes down to a few factors.

  • Whether they really need liquidity now, and if the discount is worth it.
  • And whether they want to sign up for another cycle of fees for the same portfolio, at a lower value.
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