A reckoning coming for emerging venture funds
THOUSANDS of new venture capital funds have launched over the past few years, each hoping to carve out a longterm, lucrative place for themselves. PitchBook is tracking over 10,000 funds currently trying to raise money, and 45% of them are emerging fund managers, defined as a firm with less than three funds.
Those funds are duking it out for a mere 16% of the total capital that limited partner investors will spend on venture capital, according to PitchBook, down from about 23% for the decade that ended in 2019, before the pandemic-era VC frenzy years.
More funds fighting for fewer dollars means a challenging landscape. We took the pulse of emerging fund managers about what it’s been like for them during these post-ZERP, venture-capital-winter years. For the most part, things seem to be shaking out quite nicely for emerging managers despite the economic headwinds.
They admit that fundraising is tough, both for themselves and their founders, which means that in order to survive they are having to get creative. Some firms have had to cut their fund targets so they could close and start putting the funds to work. They’ve also had to get in with the big, multistage firms or risk losing out on deals.
“It’s really challenging how quickly things change within a market based on underwriting the type of founders we’re looking for and how the public markets look,” Marcos Fernandez, managing partner at Fiat Ventures, told TechCrunch. “If someone’s out there as a solo GP or even a couple of GPs without really anything too unique outside of being former operators, entrepreneurs, it’s really difficult to raise an emerging fund right now.”
When Joanna Drake, co-founder and managing partner at Magnify Ventures, went from being an entrepreneur to an investor, she had to learn that fundraising for a startup is wildly different than for a fund.
Joanna Drake, co-founder and managing partner at Magnify Ventures. Image Credits: Joanna Drake
“I found building the emerging fund one of the hardest things to do,” Drake said in an interview. “There’s so much complexity around getting a first- or second-time fund off the ground.”
As an entrepreneur, you have a short list of firms, you set your target date, take meetings and within a certain period of time know if you will be successful raising for your startup or not. As an emerging fund manager, “you can actually wander for years taking meetings without a lot of feedback,” she said. Drake’s pedigree includes three successful venturebacked exits, and what she called “a very perfect resume” that included Berkeley and Stanford. Even so, the “long-winded and challenging process to raise capital” inspired Drake and Ben Black to create Raise Global, a community for emerging fund managers and the “forward-thinking LPs” as it calls them, who back them.