Should We Activate the 10-Year Fund Extension Clause? What Alternatives Exist?
The venture capital world faces a growing disconnect: while funds are structured for 10 years, the systematic activation of extension clauses is becoming the norm rather than the exception. Recent data is clear: nearly 78% of vintage 2012-2014 funds have activated their extension clause, compared to only 45% for 2005-2007 vintages.
After several months of discussions with institutional investors and General Partners worldwide, one observation stands out: this practice is not trivial and reveals deep structural flaws in the VC ecosystem.
I - The Standard Model Challenged
VC funds, since their transformation in the 90s, have adopted a standard 10-year format, with a possible 2-year extension. Fund of funds, meanwhile, typically extend to 15 years. This model, inherited from an era when Amazon took just 3 years to reach IPO, seems anachronistic today.
A Preqin study reveals that the average time to complete exit has increased from 4.5 years (1995-2005) to 7.8 years today. At the same time, the number of tech IPOs has fallen by 65% between 2021 and 2023, closing off the royal exit route. Faced with these structural changes, the activation of extensions has become almost systematic, raising several fundamental questions:
Is it merely a liquidity problem in the market, as strategic acquisitions have decreased by 38% in volume since 2020?
Does it reveal a lack of GP skills in portfolio management, particularly in preparing for exits?
Is it the absence of "mercenaries" specialized in managing fund closures and optimal valuation of residual assets?
II - The Measurable Impact for Limited Partners
These questions are crucial as they send a decisive signal to LPs, whose main KPIs remain DPI (Distributions to Paid-In) and IRR (Internal Rate of Return) for comparing asset classes.
Cambridge Associates' analysis of 324 VC funds shows that a 2-year extension reduces the average IRR by 1.8 percentage points – a considerable difference when the gap between a top-quartile and median fund is often less than 5 points. For an institutional fund allocating €250M to VC, this decrease represents tens of millions of euros in lost present value.
Systematically resorting to extensions compromises LP trust, reduces their IRR, and significantly complicates future fundraising. PitchBook data shows that 62% of GPs who used two full extensions encountered significant difficulties raising their next fund, with an average reduction of 35% in capital raised.
III - The Silent Revolution of the Evergreen Fund
To circumvent this systemic problem, several major funds (Andreessen Horowitz, General Catalyst, Lightspeed) have developed a solution: an evergreen fund holding their 10-year funds, allowing them to do secondary transactions on their own funds without excessive discount, which regularly reaches 30-40% in the conventional secondary market.
This evergreen vehicle, which can exceed several billion dollars in capitalization, pursues three strategic objectives:
Holding the classic 10-year funds, creating a tax-optimized cascade structure
Retaining the most promising participations at closing to maximize future capital gains (with "winners" statistically representing 4.5% of investments but 60% of returns according to a Horsley Bridge study)
Recovering end-of-portfolio positions not liquidated within the set timeframes, with enhanced negotiating power
IV - Alignment of Interests as a Competitive Advantage
For LPs, this model reveals optimal alignment of interests. GPs, often majority shareholders of the management company, have a strong incentive to optimize portfolio management:
Quickly selling positions without real potential, reducing the opportunity cost of internal resources
Not letting underperforming assets linger, with a decision rate 2.7 times faster according to an SVB Capital analysis
Maximizing the value of the evergreen vehicle, whose valuation directly impacts their personal wealth
A comparative analysis by Hamilton Lane of 87 fund structures shows that models incorporating evergreen funds display a 31% higher capital distribution rate over years 7-10, and an improved overall multiple of 0.4x.
This also sends a powerful signal to LPs: they can anticipate 10-year funds that will honor their commitments within the expected timeframes, a decisive factor when 82% of institutional asset managers consider timeline compliance a "very important" criterion in their allocation decisions.
V - Fundamentally Rethinking the 10-Year Duration
A crucial and counter-intuitive point: of 32 GPs surveyed, none indicated that 6 years were insufficient for a participation to achieve the performance necessary to meet its hurdle rate (generally 8% IRR). Crunchbase data confirms that 91% of major successes (valuation >$500M) reach this stage within 72 months following initial investment.
The 10-year duration is therefore not inherently problematic but represents a constraint to master for optimizing performance.
Ultimately, the question is not so much about extending fund duration as it is about structurally rethinking their model to create a more efficient ecosystem. Evergreen funds, as fund of funds with reduced management fees (0.75-1.25% versus the classic 2%) but slightly higher carried interest (22-25% versus 20%), potentially represent the future of an industry undergoing profound change.
Conclusion: A Necessary Paradigm Shift
The systematic activation of extension clauses is not a simple cyclical anomaly but a symptom of a model reaching its limits. Evergreen funds and other innovative structures are just the beginning of a fundamental transformation in venture capital.
Tomorrow's leaders will be those who have adapted their structural model before the market forces them to do so. For LPs, vigilance is essential: fund architecture is becoming a differentiating factor as important as investment thesis or track record.
In a context where outperformance is becoming increasingly rare (only 8% of funds consistently beat their benchmark according to Preqin), structural innovation is no longer an option but a necessity.
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If you think of how AI startups accelerate revenue faster and probably disrupt each other faster, it sounds like a long-term cycle of expected returns might not be the best option.
I'm not sure the current system of how capital is being thrown at generative AI companies makes a lot of sense in the case of Thinking Machines or SSI. I mean I understand that OpenAI and Anthropic are like a duopoly now. And frankly it limits the trajectory of any serious startups in those domains capping the future.
Sorry a bit of a rant and not necessarily related to your key topic. But it's been on my mind that there is a disconnect here as well.
Interesting