Key Strategies for Navigating the VC Fundraising Environment for Emerging Managers
By Eitan Meisels, Investment Associate
The venture capital fundraising landscape remains challenging as the public markets stabilize, with the S&P 500 seeing a 10% increase in Q1 2024. The shift from the highs of 2020-2021 has particularly impacted new and emerging VC managers. In 2023, VC firms raised $82 billion across 597 funds—a stark decline from the previous year's $188 billion across 1,458 funds, as reported by Pitchbook. This contraction reflects a more discerning approach from Limited Partners (LPs), especially evident as first-time funds saw a 57% drop in count, yet only an 8% decrease in dollars raised. This signals a flight to quality, with LPs favoring newcomers that have demonstrable success such as successful angel track records or strong public brands.
The challenges aren't confined to emerging fund managers; experienced managers are also navigating a near-60% drop in fund counts year-over-year. Despite historical success or established brands, today's environment demands more from every manager. At Allocate, our investment team engages with hundreds of emerging managers each year, providing a strong pulse on the emerging manager market, as well as overall General Partner (GP) sentiment. Here are some of the top strategies we’ve complied from all the meetings:
LP Diligence is Critical: Before GPs approach an LP, it is critical that they understand the LP's current investment focus, process, timelines, and fund preferences.
Efficient Time Management: GPs should prioritize deeper engagement such as deeper due diligence or portfolio reviews that focus on advancing the fundraising process.
Pitch Decks: It goes without saying but maintaining clarity and brevity is essential. Decks should intrigue and inform, leading with essentials such as firm overview/thesis, team bios, track record (if applicable), biggest markups/wins, fund size, portfolio construction, timing, and terms.
Emphasize GP-Thesis Fit: GPs must clearly demonstrate how their background and strategy align to fill a unique niche in the market. This alignment should be evident not only in their pitch but in their portfolio construction (read more about Allocate’s GP-Thesis Fit Model write-up here).
Well-Organized Data Rooms: GPs must ensure that their data room is logical, comprehensive, and accessible, containing all necessary documents to facilitate informed decision-making by LPs. Documents include fund marketing deck, historical performance/schedule of investments (SOI), portfolio model, sample investment memos or case studies, audited financials, general policies/processes, and legal docs: limited partner agreement (LPA) or summary of terms, private placement memorandum (PPM), due diligence questionnaire (DDQ), and subscription documents. While PPMs and DDQs are not mandated, providing them can save both the GP and LPs valuable time addressing commonly asked and administrative questions.
Transparent Valuation Practices: GPs should provide clear, defensible valuations of their investments, allowing LPs to understand and trust their judgment and methodology. LPs value TVPI as a general indication of potential performance when there aren't realized returns. When examining prior fund performance, LPs might ask about deployment pacing and valuation methodology. GPs should include investment dates in their SOI, a one-pager on valuation methodology, and be prepared to discuss each investment and its mark within their SOI. LPs appreciate understanding where VCs are holding investments relative to previous valuations, especially during market highs like those experienced in 2021.
Long-Term Vision: GPs should articulate a clear and ambitious long-term strategy for their firm, detailing how they plan to evolve and scale over time. Knowing what type of firm a GP aims to build extends beyond headcount—it touches firm economics, such as who receives carried interest, investment committee protocols, sourcing strategy, founder support, branding, diversity, equity, and inclusion, as well as succession planning.
The Power of Intangibles: Integrity, hustle, humility, and motivation can often tip the scales in a GP's favor. These qualities, while intangible, resonate deeply with LPs during the evaluation process. The closest quantitative measure of these intangibles is a Net Promoter Score (NPS) from founders.
“The investors who will win over time are those who have strong opinions, deep domain expertise, and high conviction in their space – a strong GP-thesis fit.”
By embodying these principles, emerging VC managers can navigate the complex currents of today's fundraising environment. Our insights, derived from extensive discussions and interactions within the venture community, are intended to serve as a tool for new managers looking to get their funds off the ground and build a successful venture franchise.
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