Hard Times for New Funds

“You’re going to see a lot of emerging managers shut down in the next few years,” said a VC I met with this morning. She couldn’t stay long — she was heading to California to fundraise.

The down market is hitting emerging managers hard.

These VC’s are on their first few funds. Many are struggling to raise capital .

A report out this morning from Ryan Hoover’s Weekend Fund shows just how tough fundraising has gotten for VC’s:

2023 is on pace to have the lowest fundraising total since 2017.

LPs are moving to risk-off in VC, passing on emerging managers in favor of established managers.

Many LP’s are overexposed to venture. Their public stocks have dropped, but many venture funds haven’t taken commensurate markdowns.

That means their allocation to venture as a share of assets has ballooned. The last thing they’re going to do is add more!

Even if they do, it will probably go to a fund they have a longstanding relationship with.

About a third of the 195 emerging managers in Weekend Fund’s survey have cut their target fund size.

Barren coffers at VC firms mean less money for founders:

“Only 6.1% of active startups on AngelList raised a round or exited in 1Q23, the lowest rate ever observed in our dataset. This rate of investment activity is a 1.3% decline from 4Q22’s rate of 7.4%, and a 5% decline from 1Q22’s rate of 11.6%.”

If founders aren’t raising what they hoped, there’s a reason: fund managers aren’t either.

No one wants to admit that. So they keep taking meetings and giving out “maybes.”

One fund manager the Weekend Fund spoke with had a great tip:

“Pay attention to which Emerging Managers are actively announcing new investments and which ones aren’t. We are aware of many small firms that have essentially stopped new investments and are struggling to raise their next fund.”

This way, founders won’t waste time talking to firms with no money to invest.

Perhaps one reason VC’s can’t raise is they don’t have enough skin in the game. 6 in 10 emerging managers committed 2% or less to their fund.

On a $10 million first fund, that’s just $200,000.

Most people who start VC funds are already pretty well-off. Three quarters worked in VC previously, often for years.

A 1 or 2% commitment may not be enough to show LP’s you really believe the fund will crush it.

On the bright side, VC’s that do raise now are in a fertile environment. Valuations are down and many weak companies have exited the market, leaving only the strong.

Some of the funds raised today may be among the best of all time.

What do you think of the fundraising landscape for VC’s and founders? Leave a comment and let us know!

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