Introduction:
The venture capital industry has seen a surge in the number of emerging fund managers in recent years. However, with more funds competing for a smaller share of capital, the landscape has become increasingly challenging. Despite the obstacles, emerging fund managers have found ways to navigate the market and succeed. Through interviews with industry experts, we explore the strategies employed by these managers and the future of the industry.
The Challenges of Fundraising:
Fundraising is a difficult process for emerging fund managers, both for themselves and their founders. As a result, they have had to get creative in order to survive. Some firms have had to lower their fund targets to close deals and start putting the funds to work. Additionally, emerging managers have had to establish relationships with big, multistage firms to avoid missing out on investment opportunities. It’s a challenging environment for solo general partners or those without unique attributes beyond their past experience as operators or entrepreneurs.
The Difference Between Startup Fundraising and Fundraising for a Fund:
Transitioning from being an entrepreneur to an investor can be a challenging process. Joanna Drake, co-founder and managing partner at Magnify Ventures, found that fundraising for a fund is significantly more complex than fundraising for a startup. As an entrepreneur, you have a short list of firms, set a target date for fundraising, and quickly determine if you will be successful or not. However, as an emerging fund manager, the process can be much longer and less predictable, with meetings that may not yield immediate feedback.
To address the challenges faced by emerging fund managers, Drake and Ben Black created Raise Global—a community for emerging fund managers and forward-thinking limited partners (LPs). Raise Global helps managers connect with LPs who are willing to take a risk on emerging managers but lack the resources or time to conduct due diligence themselves.
The Changing Landscape of Emerging Managers:
The Raise community has seen significant changes among emerging managers over the past decade. The newest set of emerging managers is more geographically dispersed and diverse compared to the traditional Silicon Valley stereotype. Additionally, more emerging managers have been able to raise larger funds, including some in the $100 million range. This trend indicates a shift in the industry and presents exciting opportunities for both managers and LPs.
The Fundraising Landscape:
While there are success stories of emerging managers raising large funds, the majority of the action is taking place in the $0 to $49 million range. In 2023, only 20% of emerging managers raised $100 million or more, compared to 29% in 2022 and 26% in 2021. Around 27% of managers targeted the $50 million to $99 million range, down from 29% in 2022 and 36% in 2021. These statistics highlight the importance of smaller funds and their role in working with larger firms to create syndicates.
The Importance of Building a Track Record:
Having a track record of successful investments is crucial for emerging fund managers. However, the odd winter period experienced in recent years has made it challenging for newer managers to build a track record in a time of valuation reset. Limited partners need to carefully evaluate emerging managers and not solely rely on past performance to assess their potential for success.
Playing to Their Strengths:
Emerging managers must play to their strengths to differentiate themselves in a competitive market. This can involve specializing in certain industries or leveraging their deal flow perspectives and connections with founders. Many emerging managers are targeting specific sectors where they have expertise to provide value-add support to founders. By focusing on their unique strengths, emerging managers can attract startups and secure their place alongside established venture firms.
The Role of Emerging Managers in Deal Flow:
Emerging fund managers play a crucial role at the top of the deal-flow funnel. They help larger venture capital firms identify promising companies and invest in them before they gain attention from larger check writers. This relationship benefits both emerging managers and larger VCs, as it provides access to new deals and opportunities for collaboration. Building networks with multistage firms is essential for emerging managers to thrive and gain exposure to high-quality deals.
The Future of Emerging Managers:
The VC winter has lasted long enough that a shake-out is expected among emerging fund managers. While not all emerging funds will survive, those with staying power will become stronger with less competition for deals. Increased specialization will make emerging managers even more valuable to larger firms looking to invest in Series A-, B-, and C-stage companies. In Latin America, where pre-seed and seed-stage funds are not yet widespread, a push for specialization is expected in the coming years.
Conclusion:
Despite the challenges of fundraising and increasing competition, emerging fund managers have found ways to thrive in the venture capital industry. By leveraging their unique strengths, establishing relationships with larger firms, and specializing in specific sectors, emerging managers have carved out a space for themselves. However, the industry is likely to see a shake-out in the coming years, with only the strongest and most specialized emerging managers surviving. Overall, the future looks promising for emerging fund managers who can adapt and innovate in an ever-changing market.
