Successful exits, the transactions that let founders and early investors cash out with significant gains, have become vanishingly few and far between. That’s because it’s been next to impossible for startups to go public, and the regulatory climate for extremely large mergers and acquisitions is generally unfavorable, too.
Many venture funds so far have been betting on lower interest rates and better IPO conditions in 2025. But the Federal Reserve recently signaled that it will make fewer rate cuts than expected.
For many funds, particularly those in the middle quartiles when it comes to assets under management or performance, it’s time to move on with life.
They aren’t in a position to lead elite investments in areas such as AI and cybersecurity, where hypergrowth and an IPO are possible. But they aren’t zombie funds, either. To survive, let alone prosper, they need an alternative to the traditional venture capital math based on big-number investments, $1 billion-plus valuations and gargantuan exits.
The good news is that current conditions have prevailed since the Fed began raising interest rates in 2022—long enough that a few funds have brought forth alternatives to holding their breath or trying to manifest something better. Touring Capital arrived in 2023 with just such a thought in mind: It has positioned itself as an early growth stage fund with a focus on unconventionally modest Series B rounds.
Co-founder and General Partner Nagraj Kashyap has been around the block as a former software engineer and managing partner at the $100 billion SoftBank Vision Fund. He also joined Microsoft in 2016 to run its venture business, which rebranded as M12 in 2018. In addition, he was a founding partner and global head of Qualcomm Ventures. His investments include videoconferencing pioneer Zoom Communications and navigation service Waze.
So Kashyap knew that startups were staying private for longer, but even he was surprised when research showed IPOs could take 15 years, far too long for venture investors to tie up their capital. And he knew firsthand that billion dollar-plus exits via mergers and acquisitions are exceptionally difficult to achieve.
“So imagine a company that gets funded today at $1 billion—join the IPO queue because you’re not going to get bought,” Kashyap said. “M&A over $1 billion is always, always hard, not only from the regulatory perspective but also from a company perspective. At a certain scale, C-suite, board approval, is required, so the hurdle becomes harder for M&A, which means that the companies getting funded between $1 [billion] and $1.5 billion today, their only option for a successful exit is a public market offering.”
Finding a faster solution
Touring builds relationships with startup founders at an early stage and advises them to take a smaller round of capital than they would traditionally raise, especially at the Series B stage. They get less rocket fuel to underwrite rapid growth, but founders and initial investors’ stakes are also less diluted. That should allow them to ultimately sell their companies for more modest valuations and still make substantial returns on their investment of time and capital.
“A larger fund will have to invest in a quantum that is very significant because they can’t do $5 million or $10 million at a time,” Kashyap said. “So they’ll invest between $75 [million] and $100 million. Then you see that that means for the full B round, it becomes $150 million and the dilution for the founder becomes significant. That’s basically the math that goes on, which sometimes artificially takes the pricing higher.”
The total size of each B round involving Touring is $30 million to $40 million.
A person with knowledge of Touring said it is raising $300 million. It is the lead investor in B rounds at SafeBase, an AI software company that helps companies manage security and privacy compliance; Daloopa, which makes AI software to extract and organize financial data from company filings, investor presentations and other sources; and Numa, an AI platform for auto dealerships. It led a C round at Pixis, a codeless AI infrastructure company for marketers, agencies and creative professionals. “Codeless” refers to AI tools and infrastructure that can be used without coding or programming expertise.
Touring also participated in a seed round for CuspAI, which it said leverages generative AI to accelerate the discovery and design of materials with precise functionalities.
It’s too early to know if the Touring approach will work since it launched only about 16 months ago. Given its recent formation, it has no exits to date.
But it’s important to see that venture capital, designed to capitalize on “broken” models and experiences in a wide range of markets, is beginning to train its sights on itself, where there’s a pressing need for greater liquidity.
Limited partners such as pension funds and university endowments need a more predictable return on capital. And venture funds themselves need to be able to exit their investments in a reasonable time frame, so that they can achieve a return—and redeploy their capital into the next generation of startups.
Write to Steven Rosenbush at [email protected]
