Michael Kim of Cendana Capital is often a first call for emerging seed-stage fund managers. Cendana has invested in many VC teams that have gone on to enjoy great success – like Forerunner Ventures, K9 Ventures, and IA Ventures. Thanks to its own backers, Cendana keeps replenishing its supply of investing capital, too.
Indeed, Kim tells us that 13-year-old Cendana just closed on $470 million across several new funds that bring the firm’s total assets under management to roughly $2 billion. The biggest pool, $340 million, will be funneled into U.S.-based investors. Another $67 million will flow to managers outside the United States. Cendana also has $30 million in capital commitments to invest directly in startups and $30 million from the University of Texas, whose positions will reflect that bigger, $340 million fund.
We talked with Kim earlier today about the current market, where exits are few and far between. We also talked about seed-stage managers who happen also to run companies and are, in some cases, currently preoccupied with making sure those companies survive this topsy-turvy market. Kim called us from his home in the Bay Area ahead of a trip next week to Singapore, where many institutional investors are expected to gather for a summit hosted by the Milken Institute, as well as a Formula 1 race.
You can hear our full conversation; meanwhile excerpts follow below.
You long invested in seed funds that were no larger than $100 million in size; what’s the strategy for your newest flagship fund?
It’s always been a line in the sand with us, and seed-stage venture has changed in the past 10 years. When I started, most seed funds were up to $50 million in size, and seed rounds were $1.5 million; now the median seed round in our portfolio is $4 million. So we’ve adapted with the market, though I think over the next few years that seed funds will scale back in size because it’s a lot harder to return five times $150 million than $50 million.
I’m surprised you’re not seeing that happening already.
We are to some extent. One of our fund managers in Prague had done extremely well investing out of a $125 million fund; they were the seed investor in UiPath. But they made the disciplined decision to scale back their next fund, which is where we entered, and it’s a $75 million fund. I think you’re going to start seeing a little bit more of that over the next few years.
What kind of returns are you generating cash on cash, minus fees?
In our first fund – so the most fully baked – our net return to our investors is 4.2x. And we’ve distributed back 2.2x of their capital as distributions. If we look at our second fund, it’s marked somewhere in the mid threes, and it’s almost approaching 100% and distributed. Venture is a long game. It does take time for companies to become substantially valuable, I’d say seven to eight years, if not longer. So I feel good that our formula works, and we’ve been very consistent about maintaining that approach.
There’s been a dearth of exits over the last couple of years. Have you sold off some of your positions in the secondary market for some liquidity, either stakes in certain funds or direct investments?
No, we’ve not and for better or worse, none of our LPs have offered to sell their positions in Cendana, so I feel somewhat happy about that. But I think secondaries are a very important element of venture and that we’re going to see a lot more activity there. There is actually this green space relating to the addressable market versus the actual funds there. So I think you’ll actually see more secondary activity and more secondary firms being started actually over the next couple years.
I don’t doubt that. As for you, why haven’t you sold anything? Is it because you think prices have not settled?
We invest in our fund managers. We expect it to be a multi-decade relationship. Of course, things don’t always play out and we don’t re-up with some of our core managers. But we haven’t put up for sale our positions because we ultimately think that we’re making a bet on the fund manager, and then they make the decision whether to sell a position or not. Part of our success has been that our fund managers have been proactive in terms of selling off part of their positions in companies; we’ve had a number of our fund managers put 10% to 20% of a position up for sale. To be honest, it was a little easier in 2021, where everybody wanted to get into these unicorns and were looking to source shares any way they could.
I saw an announcement for a debut fund that you backed in May, founded by serial entrepreneur Mark Ghermezian, who is concurrently running his newest company now. How do part-time VCs stack up against full-time VCs?
Mark is amazing; he was the cofounder and initial CEO of a company called Blaze that’s now about a $4 billion market cap company. He’s very well-known amongst the founder community, and at the seed stage, founders introducing other founders is really the best source of deal flow for our fund managers.
Founders with side funds was something difficult for institutional LPs to get their arms around at first.. But we took the risk of trying to back some of them [and have no regrets].
Institutional investors like Cendana have more leverage than they’ve had in years, with money in shorter supply. Have you asked for better terms from your venture managers than might have been possible in 2020, for example?
In the big picture, we’re not asking for any more terms or special terms. We’ve never asked for a cut of the management company, for example, or a special reduced carried interest. We’ve never done that. And in our minds, for fund managers who offer that, it’s actually a negative signal.