First-time VC managers who raised their inaugural vehicles during the flush years of 2021 and 2022 are finding that fundraising isn’t as easy the second time around.
Compared with past cohorts, they’re raising fewer second funds than ever before, further evidence that emerging managers in the US continue to struggle as economic uncertainty roils the VC landscape.
“What people are facing in their businesses right now is causing them to pause,” said Carey Ransom, a first-time manager at BankTech Ventures, which closed its debut fund in 2022. “We’re asking people to take a 10-year journey, and when things are challenging like they are now, they probably think it’s going to be like this forever.”
2021 and 2022 were record years for fundraising. In 2021, first-time VCs gathered an all-time high of $24.1 billion, according to the most recent PitchBook-NVCA Venture Monitor. The following year, it was VC fundraising overall that hit a record: $198 billion in total commitments.
Now, the environment has shifted dramatically. Of the first-time managers who raised in 2021, only 33% have raised a second fund. For emerging firms that fundraised in 2022, only 12% have raised a second fund. On average, the median time between funds has typically been less than three years, according to PitchBook data.
Ransom, who is raising a second fund, said he fears that less capital committed to emerging managers could exacerbate the gap with the larger, more established funds.
“It really is a tale of two worlds,” Ransom said. “Now you have more LPs bought into the power law than ever before, and they’re saying unless you have clear access to next power law companies, you’re in a tweener place where they may not find a place for you to fit into an allocation matrix.”
Larger VCs have had no trouble raising capital this year. Just 12 firms have raised more than 50% of all venture cash in the first half of this year.
Capital concentration among a select few investors can have all kinds of ramifications for the VC landscape, according to Kyle Stanford, the director of US venture research at PitchBook.
“A lack of capital available to emerging managers has longer-term ramifications on developing investor talent,” he said. “But more immediately, it concentrates capital in managers that then have pricing power in the market, and may not be able to bring the fresh creative ideas that some founders will need.”
Some VCs are pointing to economic volatility as a reason fewer LPs are making bets on emerging managers.
“What’s different now than at the high times is the degree of economic uncertainty that goes beyond the stock market,” said Amy Francetic, founder and managing GP at Buoyant Ventures, which raised its first fund in 2022. “People are spooked; they’re not feeling confident economically about the future.”
Shifting political landscapes are making fundraising more challenging. Buoyant is a climate-focused fund, and as the Trump administration rolls back clean energy initiatives, the market has become more challenging for firms that rode a wave of momentum to funding.
“There was such a movement globally, and we were part of this wave,” said Francetic. “Now there’s a lot of headwinds for the category, and it’s super disheartening for folks.”
According to Francetic, the highs of 2021 and 2022 have led to an LP overexposure in the venture asset class, another reason fewer are willing to back emerging managers.
“LPs haven’t expected returns by a Fund II, but because their money is tied up in venture right now, they’re looking for liquidity,” she said. “The problem with the asset class is there haven’t been strong returns—never mind from emerging managers, but from everyone.”
Featured image by Mara Potter/PitchBook News
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