General Catalyst is working on a ‘continuation’ fund worth up to $1B, sources say

General Catalyst, one of Silicon Valley’s largest capital firms, is gearing up to launch what’s known as a “continuation fund” worth between $800 million and $1 billion, according to a person familiar with the plans.

A continuation fund consists of a portion of stakes that the VC firm has in portfolio companies. With around $25 billion in assets under management as of 2023, General Catalyst’s exact continuation fund portfolio composition is still being determined. However, it will likely include stakes in Stripe, Gusto and Circle, the person said. The firm has recently hired Jefferies as its secondary investment advisor.

Once the fund is established and investors are found for it, General Catalyst’s original limited partners will be offered a choice: sell their shares and cash out, making way for new investors, or stay invested in the continuation fund, a process called ‘rolling.’

While private equity firms have used continuation funds for a long time, the mechanism has only recently grown in popularity with venture capitalists, largely because of the dearth of IPOs and slowdown in M&A activity. This has forced some large venture capital firms to tap the secondary market to return capital to their  limited partners.

For instance, In July, Bloomberg reported that NEA sold stakes in 11 portfolio companies, including Databricks and Plaid, to secondary investors who collectively paid $540 million for the assets. Lightspeed is also now in the process of selling a group of existing companies worth as much as $1 billion to secondhand buyers.

Like NEA and Lightspeed, the General Catalyst continuation fund will consist of late-stage startups whose values have appreciated since the firm first invested in the assets. 

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

The primary benefit of a continuation fund, as opposed to simply selling the shares outright to another buyer in a secondary market transaction, is that it allows VCs to continue to manage the shares, retaining any future upside of them. Continuation funds are also considered more founder friendly than secondary sales of shares of individual startups because they don’t introduce new owners to a startups’ cap table. The same VC remains invested, albeit through a different fund. 

VCs have been more willing to sell in the secondary markets recently because some LPs are telling them that they will limit their investments in the VC’s next fund if they don’t receive at least some cash returns from their older investments. 

Although continuation funds are generally a “win-win” for venture funds, they could be a conundrum for certain limited partners. Since secondaries sell at a substantial discount to current valuations—typically 20% to 30% off current valuations—when selling shares, limited partners may not not only be taking a haircut on existing valuations but also walking away from potential share price growth.

Still, one of General Catalyst’s limited partners told TechCrunch that, given the lack of liquidity from venture capital investments, his pension fund will always elect to cash in rather than roll into a continuation fund.

As for when this LP will be offered this choice, the person didn’t say, and it isn’t possible for TC to estimate. Continuation funds are complex deals that can take six months to a year to sell. These transactions can also fail entirely. Last year, Tiger Global tried to sell a type of a continuation fund called a strip portfolio, which sells only a portion of stakes in each company. But it couldn’t find a buyer willing to pay a price that the firm thought was fair, PitchBook reported.

When earlier this year, Shasta Ventures asked its limited partners to approve a continuation fund that was priced 35% off its carrying value, the firm’s investors voted against the deal, Axios reported.
In April, Financial Times reported that General Catalyst is nearing $6 billion in capital commitments for a new primary fund.The new fund still hasn’t been announced. When TechCrunch asked for more information related to its fundraising activities last week, the firm declined to comment.