Thousands of new venture capital funds have launched over the past few years, each hoping to carve out a long-term, 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.<\/p>\n
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<\/a>, down from about 23% for the decade that ended in 2019, before the pandemic-era VC frenzy years.\u00a0<\/p>\n More funds fighting for fewer dollars means a challenging landscape. We took the pulse of emerging fund managers about what it\u2019s 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.\u00a0<\/p>\n They admit that fundraising is tough, both for themselves and their founders, which means that\u00a0in 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\u2019ve also had to get in with the big, multistage firms or risk losing out on deals.<\/p>\n \u201cIt\u2019s really challenging how quickly things change within a market based on underwriting the type of founders we\u2019re looking for and how the public markets look,\u201d Marcos Fernandez, managing partner at Fiat Ventures, told TechCrunch. \u201cIf someone\u2019s out there as a solo GP or even a couple of GPs without really anything too unique outside of being former operators, entrepreneurs, it\u2019s really difficult to raise an emerging fund right now.\u201d<\/p>\n 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.<\/p>\n \u201cI found building the emerging fund one of the hardest things to do,\u201d Drake said in an interview. \u201cThere\u2019s so much complexity around getting a first- or second-time fund off the ground.\u201d<\/p>\n 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, \u201cyou can actually wander for years taking meetings without a lot of feedback,\u201d she said.<\/p>\n Drake\u2019s pedigree includes three successful venture-backed exits, and what she called \u201ca very perfect resume\u201d that included Berkeley and Stanford. Even so, the \u201clong-winded and challenging process to raise capital\u201d inspired Drake and Ben Black to create Raise Global, a community for emerging fund managers and the \u201cforward-thinking LPs\u201d as it calls them, who back them.<\/p>\n They launched Raise Global nearly a decade ago. Its goal was to help emerging managers meet LPs who wanted \u201cto take a risk on the emerging manager category, but didn\u2019t necessarily have the resources or the energy or time\u201d to do the diligence on their own, she said.<\/p>\n A decade later, the Raise community includes hundreds of fund managers with assets under $200 million, and remains selective in its membership. Last year the org fielded 700 applicants, Drake said.<\/p>\n One exciting trend she\u2019s seen through Raise is that the newest set of emerging managers are more geographically dispersed and more diverse than the classic Silicon Valley vest wearer. In addition, more emerging managers cracked the ceiling and were able to raise larger funds, some in the $100 million range, which used to be rare.<\/p>\n \u201cThe good news is we\u2019ve been gathering data from both the LPs and the emerging managers for a decade now to show that there is a really exciting new set of managers coming through with a really different profile \u2014 geographically and diversity-wise \u2014 and LPs are really excited and continue to give back,\u201d Drake said.\u00a0<\/p>\n Raise\u2019s research among 660 emerging managers confirmed that 2023 was not the best year to raise new funds. Data showed that only 20% of emerging managers were raising $100 million, or more, funds. In 2022, that was 29%, and in 2021 it was 26%. About 27% of managers were targeting the $50 million to $99 million range, down from 29% in 2022 and 36% in 2021.\u00a0<\/p>\n Most of the action is taking place between zero and $49 million, where roughly 50% of emerging managers are raising, Drake said.<\/p>\n \u201cThat\u2019s important because while there\u2019s a handful of emerging managers that are able to raise larger than $100 million funds, it\u2019s really a small percentage of the market,\u201d Drake said. \u201cSo, they actually do not have the capital to take the companies to a later stage. They have to work with the larger firms and put together the syndicates. It\u2019s actually one of the most important roles that they play.\u201d<\/p>\n And, even if emerging fund managers successfully deploy their first funds and have good early results to show (although most funds take 10 years to return), that\u2019s not enough to be secure.<\/p>\n Theresa Hajer, head of U.S. venture capital research at Cambridge Associates, agrees that there\u2019s been an influx of emerging manager funds over the past seven years.<\/p>\n Cambridge is to VC funds what Michelin is to restaurants, helping to identify the best performers. But because of the odd winter period we\u2019re in, past success isn\u2019t actually a strong indicator on its own to access emerging managers, she warns.\u00a0<\/p>\n Newer managers who were investing during the 2019-2021 party days haven\u2019t yet had the opportunity to build a track record in an environment that has had a valuation reset. So limited partners \u201cneed to sharpen their pencils and look very carefully because you can\u2019t always rely on that performance,\u201d she said.<\/p>\n Cambridge is carefully assessing younger fund managers with this in mind before giving them a stamp of approval. \u201cThis is a tough, tough environment,\u201d she says. \u201cBut that\u2019s the stance that we\u2019ve taken for quite a long time, and other sophisticated limited partners in the market have done so as well.\u201d<\/p>\n Hajer also says it\u2019s important for emerging managers to play to their strengths. That can be from a deal flow perspective, connections with founders or developing relationships upstream with investors at larger firms.<\/p>\n Many new managers are doing this by specializing. They are targeting certain industries where general partners feel they have the expertise to give. Among Raise\u2019s applicants in 2023, 70% had a thematic focus, Drake said. It\u2019s also what she\u2019s done for her own fund, Magnify.<\/p>\n \u201cWe\u2019ve had some of the bigger firms, even at the Series A, reach back out and say, \u2018We would like you to come in because you are the first investor in the care economy and in family tech. We need that domain expertise and want you on the table. We want the founders to have your support,\u2019\u201d Drake said.\u00a0<\/p>\n However, that\u2019s not the case for emerging fund managers in emerging markets like Latin America. Monica Saggioro, co-founder and managing partner at MAYA Capital, told TechCrunch that because LatAm has not yet been swarmed with pre-seed and seed-stage funds, those that are tend to be generalists.<\/p>\n \u201cAs the market matures and competition increases, I believe there will be a stronger push for funds to specialize,\u201d Saggioro said, but at this rate of investment in the region, she thinks that trend could be 10 or even 20 years out.<\/p>\n For Nick Moran, general partner at New Stack Ventures, the best thing about being an emerging manager is the ability to be nimble. He compared it to being a startup competing with an enterprise selling to a big customer. Huge enterprises are often slow and laden with legacy baggage infrastructure. On the other hand, the startup is more innovative and can make decisions faster, Moran said.<\/p>\n And while the venture capital world has the Accels and Sequoias of the world, and while they \u201care wonderful and do great work, they were built in a different era,\u201d Moran said.<\/p>\n Rather, emerging venture firms have to be as innovative as the startups that they invest in, which means you\u2019re no longer just dealing with capital, he said. They have to be unique, they have to have specialization, a unique thesis and insights that provide a value add for founders. Emerging managers also have to find the right partner at big firms that have a shared philosophy or sector, Moran said.\u00a0<\/p>\nA different kind of fundraising<\/h2>\n
Secret to success<\/h2>\n
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