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.
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.”
A different kind of fundraising
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.
“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 venture-backed 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.
They launched Raise Global nearly a decade ago. Its goal was to help emerging managers meet LPs who wanted “to take a risk on the emerging manager category, but didn’t necessarily have the resources or the energy or time” to do the diligence on their own, she said.
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.
One exciting trend she’s 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.
“The good news is we’ve 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 — geographically and diversity-wise — and LPs are really excited and continue to give back,” Drake said.
Raise’s 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.
Most of the action is taking place between zero and $49 million, where roughly 50% of emerging managers are raising, Drake said.
“That’s important because while there’s a handful of emerging managers that are able to raise larger than $100 million funds, it’s really a small percentage of the market,” Drake said. “So, 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’s actually one of the most important roles that they play.”
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’s not enough to be secure.
Theresa Hajer, head of U.S. venture capital research at Cambridge Associates, agrees that there’s been an influx of emerging manager funds over the past seven years.
Cambridge is to VC funds what Michelin is to restaurants, helping to identify the best performers. But because of the odd winter period we’re in, past success isn’t actually a strong indicator on its own to access emerging managers, she warns.
Newer managers who were investing during the 2019-2021 party days haven’t yet had the opportunity to build a track record in an environment that has had a valuation reset. So limited partners “need to sharpen their pencils and look very carefully because you can’t always rely on that performance,” she said.
Cambridge is carefully assessing younger fund managers with this in mind before giving them a stamp of approval. “This is a tough, tough environment,” she says. “But that’s the stance that we’ve taken for quite a long time, and other sophisticated limited partners in the market have done so as well.”
Secret to success
Hajer also says it’s 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.
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’s applicants in 2023, 70% had a thematic focus, Drake said. It’s also what she’s done for her own fund, Magnify.
“We’ve had some of the bigger firms, even at the Series A, reach
