VC Firms Tap LP Pools, Warehouse Loans for Speedy AI Cash

When Reflection AI set out to raise $2.5 billion early this year, one of its existing venture backers, B Capital, was eager to invest again in the startup, which has emerged as the most high-profile U.S. maker of open-source AI models. But Reflection’s valuation had more than tripled in just six months, forcing investors to write big checks for a sizable stake.

Such a check would have been too big for B Capital’s main venture fund, a $500 million vehicle raised in July. To come up with the cash, the company turned to a different source of capital: a pool of money apart from its regular fund, designed to give limited partners—the pension funds, endowments and wealthy individuals that back VC firms—more direct access to hot startups like Reflection at reduced fees.

This strategy, known as limited partner co-investing, has become increasingly popular during the last few years as funding rounds in startups have jumped in both size and frequency. It’s just one of the ways VC firms are adapting to the immense cash demands of the AI boom. Those changes also include VC firms raising funds more frequently.

They’re also taking out warehouse loans, lines of credit typically used by private equity firms. Venture capitalists are starting to tap these to come up with cash to invest in startups before the VC firms have raised money from their limited partners.

For B Capital, a VC firm led by Facebook co-founder Eduardo Saverin and two other tech investors, the limited partner co-investment pool meant the VC firm could invest $100 million in Reflection AI—double the size of what it had previously invested in the company, according to a person with direct knowledge of the investment.

VC firms have increasingly turned to such pools as startup fundraising rounds have swelled to billions of dollars at a time. The pooled limited partner funds differ from general VC funds because they tend to back just a few startups rather than the dozen-plus a more traditional fund might invest in.

Limited partners have sought out these investments to get more exposure to breakout stars in venture firms’ portfolios, such as Anthropic and OpenAI. An added plus for limited partners: VC funds typically waive or reduce their fees on money raised from limited partners for these direct or co-investments.

B Capital, for instance, sometimes offers co-investment opportunities with no management fee and a 10% performance fee, often known as carried interest, as opposed to the 2% management fee and 20% performance fee traditional for most VC funds, according to the person.

The co-investment pools also mean there’s money ready when the startup signals it’s raising again. In the past, a VC firm could spend a few weeks negotiating one-off agreements with individual limited partners to come up with enough cash to invest in a hot startup. These days, such lengthy negotiations could cause an investment firm to lose its allocation—the right to invest in a company—say venture capitalists and limited partners.

B Capital is far from the only VC firm to have pursued this strategy. Lightspeed Venture Partners brought limited partners into over $5 billion worth of co-investments over the last five years, according to a person with knowledge of its investments. Lightspeed used that money to invest in Anthropic and other startups alongside investments from its general funds. The firm typically waived management fees and reduced carried interest fees for the limited partner co-investments.

Thrive Capital has invited limited partners to co-invest while it has led huge funding rounds into companies including OpenAI. For instance, CalPERS—the California pension fund giant—invested in a Thrive special purpose vehicle that raised over $744 million to invest in Stripe in 2023.

VC firms are coming up with creative solutions to keep up with the steep cash needs of AI startups. Startup fundraises of over $100 million made up over 87% of all the money invested by VC firms in the first half of the year, according to data firm PitchBook.

To meet their needs, some of the largest VC firms, including Thrive Capital, General Catalyst and Andreessen Horowitz, have in the past year raised new funds less than two years after their last fundraising, bucking the typical two- to three-year cadence typical of most VC funds.

Megafunds are “constantly out there keeping checkwriters warm in advance of quickly raising a new fund,” said Peter Werner, chair of law firm Cooley’s global business department.

Warehouse Loans

VC firms are also beginning to explore other tactics that have been more popular with other types of investment firms, such as PE and real estate managers.

JP Morgan Chase is among the banks working with VC firms to make warehouse loans, a short- to medium-term revolving line of credit that can help the firms invest before they’ve secured the capital to do so, according to someone familiar with the bank’s thinking.

Warehouse loans also let the borrower take on some leverage, which can boost investment returns by minimizing the initial cash the firms must put forward to close investments.

A handful of VC funds are also classified as registered investment advisers, a designation that makes it easier to use short-term debt because it removes restrictions on how much debt a given firm can hold.

Warehouse loans are different from capital call credit lines, a type of loan VC firms have used for years. The firms draw on such credit lines after they’ve received commitments from limited partners for money but before the money has hit their account.

“The need to move at lightning speed to capitalize on some of these opportunities” is driving demand for loans, said Cooley’s Werner.