Emerging VCs struggle to raise funds as nervous investors funnel their money into big-name companies

Venture capital firms raised a record $151 billion from their investors this year. But for new VCs, many of whom belong to underrepresented groups, fundraising has paradoxically become more difficult.

InIn August, venture capitalist Sherman Williams learned that one of his institutional investors was waiving a check for $15 million. Williams suddenly lost 30% of the capital of AIN Ventures, a first black and women-led fund focused on deep technology that he was raising.

Many emerging VCs like Williams have seen their own investors, known as limited partners, decide to invest in already established businesses rather than making a riskier bet on less proven VCs, indicating that an industry that prides itself on taking risks becomes increasingly risk averse. with the market downturn.

Eunice Ajim, who is raising her first fund to support seed-stage startups in sub-Saharan Africa, said that when she attempted to conduct her first capital call – in which VCs asked LPs to fire part of the money they had committed – more than half of the money didn’t arrive. As a result, she was forced to make investments of $25,000 to $50,000 in startups in which she had previously hoped to invest $100,000 to $150,000.

In a more extreme case, Tiger Global, whose partners would have committed $ 1 billion to invest in emerging funds, reneged on several commitments it had made, according to several sources. Among those affected were The On Deck ODX Fund, which later suffered layoffs, and Turner Novak’s Banana Capital, which more than halved the target size of its second fund, according to three people in the know. Tiger Global, ODX and Novak declined to comment.

Tiger’s partners have dramatically reduced the size of their checks after a long wait ostensibly to do their due diligence, say two fund managers who were affected but asked not to be named because of their existing relationship with Tiger. The VC tell Forbes that the duration of due diligence has lengthened in all areas, and some assume that this is a way for LPs to meet their commitments. “We refused to go ahead with some LPs because the due diligence they were asking for was not worth what they were willing to invest,” says Tom Drummond, Managing Partner of Heavybit.

“Ultimately, the most diverse set of venture capital is in the space of emerging managers.”

Andre Charoo, founder of emerging fund Maple VC

This year, US venture capital firms raised a record $150.9 billion through the end of September 2022 from their investors, according to Pitchbook. But for emerging managers like Williams and Ajim managing unproven funds they hope to build at legendary companies, the fundraising experience has paradoxically become more difficult. Emerging funds – often the gateway for women and underrepresented minorities to enter venture capital – have been squeezed out of the budgets of institutional LPs like pension funds and university endowments.

“Ultimately, the most diverse set of venture capital is in the emerging manager space,” says Andre Charoo, founder of emerging fund Maple VC. “We have been a driving force in bringing capital to a diverse set of founders. Now that is in danger of being reversed.

According to a report per BLCK VC, 54% of black VCs who achieved “partner” status did so by creating their own fund rather than being hired or promoted by an existing company. On average, these funds are 46% smaller than the industry average, the report notes. “Sometimes people mistakenly label being Black, Latinx or female as a risk factor,” says Daryn Dodson, managing director of Illumen Capital, which invests in funds for people from disadvantaged backgrounds.

This year, only 100 new funds were successfully launched, compared to 307 last year. With emerging funds making up the majority of first-quartile performance, according to Cambridge Associates, the wrong high-risk, high-reward bets on emerging funds could now be a dismissable offense for institutional investors. That poses a tough road for the glut of VC firms born during the VC bull run – 1,100 new ones since 2018, according to PitchBook’s tally.

Meanwhile, established companies are getting bigger and bigger. Funds of $1 billion or more have received three-fifths of the capital so far this year, per PitchBook, up from 34% in 2021. As the market deteriorated, LPs began to focus their investments in this which they perceived to be safer bets.

“If you’re an institutional investor and you have a choice of investing in Andreessen Horowitz’s $9 billion fund or XYZ Company’s new fund, it’s like no one is getting fired for investing. in Coca-Cola stock,” says Garth Timoll, managing director of Top Tier Capital Partners, an institutional LP that backs venture capital funds.

In other words, institutions aren’t likely to blame their investment team for putting money into venture capital firms that have proven themselves for decades.

“We’re going to weed out emerging tourism managers who don’t have the conviction to make it work with less money. Good riddance.”

Roland Reynolds, Senior Managing Director of Industry Ventures

“We’ve had a Cambrian burst of new funds,” says Chris Douvos, a longtime LP who now runs Ahoy Capital, which invests in both startups and funds. “For a lot of people, fundraising was what law school is for aimless college kids. It seemed like a good idea and like it would be fun – and it was fun as the market went up.

But around March, when the market contracted, investors began to face a shortage of cash. Many VCs relayed to Forbes LP stories that quickly closed the door in their faces, as in the case of Heavybit, which firm an $80 million fund earlier this year. After spending months chasing a large institutional check, chief executive Tom Drummond said a university endowment abruptly told him in April that it would no longer invest in any venture capital firms. “It was a sign for us that something has really changed dramatically in the fundraising market,” he says. “When someone who’s willing to invest all that time and energy with us suddenly says, ‘We’re not sure about this space anymore,’ that was a catalyst for us to say, ‘Let’s not waste our time, let’s close our fund”. .'”

“What’s going to happen now is we’re going to find out who are the brave emerging managers who are willing to accept the $20 or $30 million funds when in the past they might have gotten $75 or $100 million. dollars,” says Roland Reynolds, senior managing director of Industry Ventures, which invests in funds and startups. “For me, it’s really healthy. We will weed out emerging tourism managers who don’t have the conviction to make it work with less money. Good riddance.”

For now, many emerging managers are waiting in the hope that LPs who gave all their money to megafunds earlier this year will have new money to allocate in 2023. But for the most part, venture capital budgets LPs for next year are already booked. for their existing relationships with venture capital firms, according to Brijesh Jeevarathnam, global head of fund investments at Adams Street Partners, which invests in venture capital funds. “I think it’s hard to predict a scenario where until 2023 that changes drastically,” he said. Forbes.

“Never let a good crisis go unused.”

Michael Kim, Founder of Cendana Capital

Williams of AIN Ventures says he knew fundraising would be extremely difficult. “I’m African American and I’m raising a venture capital fund,” he says. Forbes. “Maybe it’s Stockholm syndrome, but I just assumed fundraising was going to be a nightmare.” Nevertheless, it could become even more of a nightmare trying to raise funds next year. Even VCs who successfully raised an LP in a previous fund may not receive the money for their next effort.

“Typically in bear markets, LPs will consolidate their commitments. If they invested in ten [VC firms] before, now they could consolidate it to five,” says Atul Rustgi, managing partner of Accolade, which invests in funds, adding that he expects consolidation to begin within a year.

“The downturn is a catalyst for institutional LPs to reassess their portfolios,” says Michael Kim, founder of Cendana Capital. “Never let a good crisis go unused.”

A prolonged downturn could result in hundreds of “zombie” funds, say VCs, alongside a similar influx of VCs that emerged in the late 1990s. “Many of these funds simply withered and became deadwood. says Douvos, who worked for Princeton University’s endowment following the dot-com crash. “I remember a conversation in 2004 with [Sequoia chief] Doug Leone where he said, “We need another downturn year to really get rid of the people who don’t belong in this business.” History does not repeat itself, but it rhymes.

Kim, whose firm primarily backs smaller emerging funds, advises VCs in her portfolio to close their funds quickly — even if the fund size is below the VC’s target — and use the time instead to build a balance sheet by investing in startups.

Still, it’s a discouraging sign for emerging funds that operate as ground zero for elevating diversity in VCs and startups, Dodson says.

“When I talk to emerging women and people of color, a lot of them are just trying to figure out the fact that they’ve outperformed their peers and don’t understand why they’re not getting more allocation relative to their performance. “, did he declare. said.


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