Venture capital firm CRV planning to do something rare: Give money back

By Erin Griffith

Venture capital firms raise money — lots of it — and invest it in start-ups in hopes of generating big returns. One thing they rarely do is give the money back. Yet that is what CRV, one of the industry’s oldest firms, is planning. The firm will tell its investors this week that it will return the $275 million that it has not yet invested from its $500 million Select fund, which is designed to back more mature startups.
 

The reason, four of the firm’s partners said in a joint interview, is that market conditions have changed for the worse. The valuations for startups are too high relative to their potential for a payoff, the partners said.
 

CRV’s decision is part of a reset that is happening around the venture capital industry after the go-go years of the pandemic. In 2020 and 2021, many startups and investment firms raised outsize funding, expecting the boom to keep going.
 

In the years since, the tech exuberance faded, and many startups cut staff or shut down. The market for initial public offerings and acquisitions — the main ways venture capital firms earn a return on their investments — has also been dismal.
 

Venture capital has always experienced booms and busts, but now, the boom and bust seem to be happening at the same time. While IPOs have been infrequent and it has been hard to make strong returns for some investments, there is a frenzy to put money behind new artificial intelligence ideas.
 

It is a paradox that explains why CRV is ploughing ahead with a fund for very new startups and pulling back on investing in the later rounds of more established outfits.
 

In 2022, CRV raised a $1 billion fund for young startups and $500 million for the Select fund, its second fund for more mature companies. The firm said it needed more money to accommodate the bigger investment rounds, higher valuations and the frequency of fund-raising. But over the past year, CRV’s partners realised that they were passing on lots of investment opportunities for older, more mature companies for its Select fund. The reason was the math no longer worked. CRV does not plan to raise another Select fund.
 

In order to generate the kind of returns that CRV’s investors expected, many startups — far more than ever before — would

have to wind up being worth $10 billion or more.
 

“The data just doesn’t support that,” said Saar Gur, a partner at the firm. “There aren’t many really big foundational companies and big outcomes.”
 

If CRV kept investing at current prices, Gur said, it would wind up with lower returns. So instead of settling for worse performance, the firm decided to cut the fund.
 

CRV will continue investing out of its $1 billion main fund and is roughly two-thirds invested. The firm has signalled to its investors that its next fund is likely to be smaller.
 

CRV was founded as Charles River Ventures in 1970 for investing in companies built using research coming out of the Massachusetts Institute of Technology. The firm opened an office in Silicon Valley in 1999, changed its name to CRV in 2014 and moved fully to the West Coast in 2021.
 

This is the second time the firm has cut its fund size. In 2002 CRV slashed its $1.2 billion fund to just $450 million. Other firms, including Mohr Davidow Ventures and Kleiner Perkins, made similar moves that year in an admission that the hype had surpassed reality for many early internet startups.
 

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