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VC Fundraising

Emerging managers’ fundraising slump is a blow to smaller VC ecosystems

LPs have limited risk by sticking with more established managers, which could mean increased competition between already cash-hungry startups.

Emerging managers in the US are on track for their worst fundraising performance in seven years, with total commitments expected to come in below $20 billion. This difficult fundraising environment is likely to exacerbate regional schisms and create more competition between already cash-hungry startups.

Historically, emerging firms have invested in niche areas and early-stage startups, while also focusing on geographically underrepresented areas, like those outside of San Francisco and New York. PitchBook defines emerging managers as firms that have launched fewer than four funds.

 

Emerging managers are also known to partner with larger, experienced firms to help scout out startups. Ultimately, if emerging managers’ challenges continue, there is a risk the VC ecosystem will shrink, limiting innovation and dealmaking, according to PitchBook analyst Max Navas, who authored a recent report on the subject.

“If I’m an entrepreneur and I have my choice of starting a company in Milwaukee, versus San Francisco, and I know that Milwaukee has a way smaller amount of dry powder or managers in the area, I’d go to where the capital is, even if there’s greater competition,” Navas said.

“They fund dealmaking at the earliest stages,” he added. “With fewer managers out there, I think we’re going to see fewer startups find success.”

Despite historically high fundraising within the VC space, with a record $171 billion raised in the US in 2022, emerging managers’ fundraising peaked in 2021—and there’s no indication that momentum is building back up.

For the first time since PitchBook began collecting data, experienced managers closed more funds than emerging managers. Historically, emerging managers have closed nearly two to three times the number of funds that their more experienced peers do, according to Navas.

 

Even successful funds are showing signs of strain: The average fund size for an emerging manager is now $41.7 million, less than half what it was last year.

The current economic environment is making it hard for LPs to want to invest in firms without a track record, according to Navas, who pointed out that the firms currently benefiting the most are those with strong networks. Endowments and both public and private pension funds are committing less capital to emerging managers and recommitting at even lower rates. Navas estimates that the gap between experienced and emerging managers is about 11 to one.

“When you’re an emerging manager, you have to fundraise from your immediate network, you don’t have the brand name and the proven track record to attract LPs on their volition,” Navas said.


Featured image by Mara Potter/PitchBook News

  • jacob-robbins-headshot.jpg
    About Jacob Robbins
    Reporter Jacob Robbins covers artificial intelligence and the venture capital ecosystem for PitchBook. Based in Seattle, Jacob is originally from Massachusetts and holds dual degrees in political science and cinema studies from the American University. His work has previously appeared in Air Mail and Business Insider.
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