One of the biggest capital firms in Silicon Valley, General Catalyst, is gearing up to launch what's being called a "continuation fund" with between $800 million and $1 billion, according to someone familiar with the plans.

A continuation fund is a percentage of stakes that the VC firm owns in its portfolio companies. As of 2023, General Catalyst has nearly $25 billion in assets under its management. While the final make-up of General Catalyst's continuation fund portfolio is still to be announced, it is likely to comprise stakes in firms including Stripe, Gusto and Circle, according to the person. The firm has recently hired Jefferies as its secondary investment advisor.

It will then present this continuation fund to its original limited partners, where they are given an option: sell their interests and cash out, paving the way for new investors, or remain invested in the continuation fund-a process called 'rolling'.

Though the private equity firm has been utilizing continuation funds for years, this mechanism has acquired popularity with venture capitalists only lately due to the scarcity of IPOs and M&A slowdown. This has forced some large venture capital firms to tap the secondary market to return capital to their limited partners.

For instance, in July, Bloomberg reported that NEA sold stakes in 11 portfolio companies, including Databricks and Plaid, to secondhand investors who collectively paid $540 million for the assets. Lightspeed is also now in the process of selling a group of existing companies worth as much as $1 billion to secondhand buyers.

Like NEA and Lightspeed, the General Catalyst continuation fund will be made up of late-stage companies whose values have appreciated since the firm initially invested in the assets.

General Catalyst did not return a call for comment.

What's important is that one major advantage a continuation fund has over selling the shares outright to another buyer in a secondary market transaction is that it allows VCs to continue to administer the shares-that is, they get to retain all the future upside of them. Continuation funds are also considered more friendly to founders than secondary sales of shares of individual startups because, as already mentioned, they do not introduce new owners into the cap table of startups. The same VC remains invested, although through a different fund. VCs have lately been more eager to sell in the secondary markets because some of those LPs are warning them that they will cap their investments in the VC's next fund if the latter do not generate at least some cash returns from their older ones.

While continuation funds are typically a "win-win" for the venture funds, they might be a problem for some limited partners. Indeed, because they sell at a considerable discount to current valuations—typically 20% to 30% off current valuations—they're forfeiting future appreciation in the share price.

But one of General Catalyst's limited partners told TechCrunch that, given the lack of liquidity from venture capital investments, his pension fund will always elect to cash in rather than roll into a continuation fund.
And when this LP will be offered this choice, the person didn't say, and it isn't possible for TC to estimate.

It requires messy transactions, which take six months to a year before getting rid of it. And it fails altogether. Last year, the private equity group Tiger Global tried to sell a type of continuation fund known as strip portfolio, which only sells parts of stakes in each company. It could not find a buyer who would take them off its hands at a price it considered fair, according to PitchBook. As Axios reported, when Shasta Ventures asked its limited partners to approve a continuation fund priced 35% off its carrying value earlier this year, the firm's investors rejected the deal. 

April saw Financial Times report General Catalyst to close in at $6 billion in capital commitments toward a new primary fund. That new fund has yet to be announced. When contacted last week for further information related to its fundraising activities, the firm would not comment.