Challenges Faced by Emerging Vc Firms

After speaking with hundreds of LPs and GPs over the past year, it seems that the ratio of allocable LP capital versus the amount of GP mouths to feed is by far the worst ever, which makes this an absolutely brutal fundraising environment for emerging managers. Reasons are: -Cambrian explosion of VC funds in the past 10 years means more funds are competing for LP $ than ever before -<10 megafunds are hoovering up largest-ever % and $ of LP capital -Over-allocated / illiquid LPs are cutting rather than adding new names. -QQQ and private credit performance paired with IPO/M&A winter make VC look less appealing by comparison. NET: extinction level event for sub-scale VC firms. Good luck out there friends :)

Why VC is so damn hard: one chart, two reasons. 1) It takes forever. 2) It's wildly uncertain. Data from 1,700+ US venture funds that use Carta as their fund admin. A large majority of the funds included have less than $100M in committed capital, so this mostly a reflection of emerging manager funds. Each line is a vintage year (2017-2022 included). And the percentage reflects the share of funds from that vintage that have any DPI at all ($1 counts). Of course you don't expect VC funds to start returning capital to LPs immediately, so we charted the percentage with non-zero DPI by the number of quarters since the fund started. 𝗪𝗵𝗮𝘁 𝗠𝗮𝘁𝘁𝗲𝗿𝘀 • More recent vintages have a lower share of funds returning any capital at basically every point along the timeline. After 5 years, only 36% of 2019 funds had some DPI vs 72% of 2017 funds. • But what about the secondaries wave we've been hearing about? Aren't VCs manufacturing a little DPI wherever possible these days? This data suggests not really. Secondaries are growing but are still only available for a small fraction of startups and investors.    • This lack of liquidity contributes to the difficulty many emerging managers have in raising new funds at the moment. LPs with money locked up in prior vintages are more reticent (or in some cases literally unable) to fund new vintages.    • The other, more nuanced reason LPs may not contribute to new vintages is that managers raised funds at a faster clip in the boom. If the average VC raised Fund III only 2.5 years after Fund II, it makes sense why the LPs feel tapped out on allocation.    • Common wisdom across venture is that managers that receive some early distributions (maybe a portfolio company gets acquired after Series A) would do better to recycle that capital into their winners rather than return it to LPs. I...don't know if I agree.    • Clear from the data: more emerging managers should be thinking about taking money off the table at points along the journey. Many who had that option in the 2021 boom declined to do so and are regretting that decision today. Everything looks up and to the right until it doesn't!    Lots more data coming in our VC Fund Performance Report, out on Tuesday - waitlist here: https://lnkd.in/gQuEudja #venturecapital #VCfunds #liquidity #venturefunds

There’s a crisis brewing for the next generation of venture capitalists. While Silicon Valley heavyweights like Sequoia Capital and Andreessen Horowitz are still able to bring in big checks, up-and-coming VCs are finding fundraising increasingly difficult. Hundreds of small firms — which make up the majority of the VC industry — are struggling to raise money in the current market. Traditional investors in venture funds, like family offices and wealthy individuals, have pulled back thanks to high interest rates and economic uncertainty. Meanwhile, universities and their endowments have come under increasing financial pressure from House Republicans and the Trump administration. In recent years, the whole venture industry has taken a hit, but new firms are particularly vulnerable. Emerging managers, defined as those that have raised three or fewer funds, saw their total funding in the US decline to $17 billion last year from a high of $64 billion in 2021, according to PitchBook data. So far this year, those managers have raised only $4.7 billion. The fundraising drought could spell the end for many new venture firms before they ever really got started. https://lnkd.in/enrMyuV8

About 85–90% of the funds I see are having unbelievable difficulty raising (just came across a quality emerging manager that I thought would raise in 6 months or less, but it's now month 22 of their raise). This is especially true for emerging managers that aren’t spinouts. But the other 10–15% of VCs? I'm seeing these firms raise faster than ever. Single closes, substantially oversubscribed, often wrapped up in 4 months or less from data room open to final close. It's the biggest dispersion of fundraising difficulty I’ve seen, maybe ever. That said, I’ve noticed that the quality of new EMs raising (not just spinouts) in the last 18 months is significantly higher in general than what we saw in 2019–2021. Capital-constrained periods result in real practitioners launching and staying with it. LPs that went in hard in 19-21 are probably still dealing with the aftermath, but there are some really strong EMs coming to market, which is really exciting.