TL'DR: By combining an excruciatingly difficult fundraising process with operational costs that are an order of magnitude higher - evergreen structures are often not viable for early stage VC.
Ultra Difficult Fundraising
Since there are currently no examples of succesful evergreen style VCs, especially at the early stage, professional limited partners are unfamiliar with the structure and approach. As a result, managers that try this approach are making a fundraising process that's already extremely difficult nearly impossible by adding even more complexity. With evergreen structures, mangers need to convince professional LPs that the model works in addition their investment strategy. Because professional LPs have allocations to various asset classes, they will struggle to figure where to bucket funds of this type. The net effect is that mangers who try this approach find it excruciatingly difficult to scale their fundraising process beyond high net worth individuals.
Operational Complexity & Costs
The fund operations of an evergreen structure is significantly more complex because frequent audit ready valuations, as well as distributions are necessary to accomodate an atypical valuation policy (see below), for LPs that would like to exit their positions. This creates a massive lift for the fund and it's service providers due to the frequency. Processing distributions is extremely expensive because the following service providers must all be activated at the same time: legal, fund admin, compliance and tax. In an evergreen structure, distributions often need to take place monthly or quarterly. In a classic VC structure, distributions often take years and audits happen annually. Since the operational lift is so intense for evergreen funds, the operational costs are very high. When one combines these high operational costs with the massive fundraising issues mentioned above - this creates a very high risk for default.
Liquidity Challenges
Investing in startups is extremely illiquid. It's typical for liquidity to take 7-15 years. Secondary markets are not yet developed enough to provide a stable source of liquidity that is typically necessary industries where evergreen funds to thrive such as Hedge and PE. As a result, evergreen funds must create a non standard valuation policy that allows them to 'value' the portfolio at any given point in time accurately enough to provide distributions to the LPs in need of liquidity. Over 50% of startups in any given VC portfolio will go to 0 and typically 1-2 companies are responsible for a multiple on the fund. Therefore, traditional VC valuation policies keep the investment at cost, unless there is a priced round that marks up the investment. Priced rounds often take place years post a pre-seed or seed investment and are intermittent. In an evergreen structure, GPs would have to create a non-standard valuation policy to be able to value the assets in between rounds. This is extremely difficult to do because additional inputs besides priced round valuations, are: a) difficult to collect from founders (especially in companies that have broken out and are succesful); b) early stage startup valuations are not always correlated to metrics; c) different startups measure different metrics; d) unlike in the public markets where one can mark to market, it is pretty much impossible to collect real time metrics for the majority of the startups that are on thesis.
