Michael Kim from Cendana Capital is a highly sought-after contact for emerging seed-stage fund managers. Cendana Capital has a track record of investing in successful VC teams such as Forerunner Ventures, K9 Ventures, and IA Ventures. Thanks to strong support from its backers, Cendana continues to receive new investment capital.
Recently, Cendana closed multiple new funds, totaling $470 million, increasing its assets under management to approximately $2 billion. The largest portion, $340 million, will be allocated to U.S.-based investors, while another $67 million will go to international managers. Additionally, Cendana has secured $30 million in capital commitments for direct startup investments and an additional $30 million from the University of Texas, which will be invested in alignment with the larger $340 million fund.
We had the opportunity to speak with Michael Kim about the current market conditions, characterized by scarce exit opportunities. We also discussed seed-stage managers who are simultaneously running companies, some of whom are focusing on ensuring their companies thrive in the unpredictable market. Kim spoke with us from his residence in the Bay Area, ahead of his upcoming trip to Singapore, where he will attend a summit hosted by the Milken Institute and a Formula 1 race, both expected to attract institutional investors.
You’ve historically invested in seed funds no larger than $100 million. What’s the strategy for your latest flagship fund?
Our strategy has always been to draw a line in the sand, but seed-stage venture has evolved significantly over the past decade. When I started, most seed funds were around $50 million in size, and seed rounds averaged $1.5 million. Today, the median seed round in our portfolio is $4 million. So, we’ve adapted to market changes. However, I believe that in the coming years, seed funds will scale back in size because achieving five times returns on a $150 million fund is much harder than on a $50 million fund.
Are you already seeing this scaling back?
To some extent, yes. One of our fund managers in Prague, for example, performed exceptionally well with a $125 million fund. They were the seed investor in UiPath. However, they made a disciplined decision to scale back their next fund, which is where we came in, with a $75 million fund. I anticipate we’ll see more of this trend in the coming years.
Can you share the cash-on-cash returns you’re generating, minus fees?
In our first fund, our net return to investors stands at 4.2x, and we’ve distributed 2.2x of their capital as returns. As for our second fund, it’s in the mid-threes in terms of returns, with almost 100% distribution. Venture investing is a long-term game, and it takes time for companies to achieve substantial value, typically seven to eight years or longer. I’m confident that our approach works, and we’ve consistently maintained it.
There has been a lack of exits in recent years. Have you considered selling off any positions in the secondary market for liquidity?
No, we haven’t. Interestingly, none of our LPs have offered to sell their positions in Cendana, which I’m somewhat pleased about. However, I believe that secondaries will become more prominent in venture investing, given the gap between the addressable market and the actual funds. I expect to see more secondary activity and new secondary firms emerging in the next few years.
Why have you refrained from selling? Is it because you believe prices have not stabilized?
We invest in our fund managers with the expectation of maintaining a multi-decade relationship. While things don’t always go as planned, and we don’t always reinvest with our core managers, we haven’t put our positions up for sale. Ultimately, it’s the fund manager’s decision whether to sell a position or not. Our success has been partly due to our fund managers proactively selling part of their positions in companies; many of them have offered 10% to 20% of a position for sale. It was easier in 2021 when everyone was eager to invest in unicorns and obtain shares in any way possible.
I noticed you backed a debut fund founded by Mark Ghermezian, who is also running his newest company. How do part-time VCs compare to full-time VCs?
Mark is exceptional; he co-founded and initially led Blaze, which has now achieved a $4 billion market cap. He’s well-respected within the founder community, and at the seed stage, introductions by founders are the best source of deal flow for our fund managers. Initially, institutional LPs found it challenging to embrace founders with side funds, but we took the risk of supporting some of them and have no regrets.
Institutional investors like Cendana now have more leverage due to a shortage of funds. Have you negotiated better terms with your venture managers compared to 2020?
In the bigger picture, we haven’t sought additional or special terms. We’ve never asked for a share of the management company or a reduced carried interest. We’ve maintained this approach throughout. In our view, fund managers who offer such terms may send negative signals.
