VC fundraising is only getting more challenging during this market downturn, but it's the first-time managers facing the biggest hurdles. So, what's a new GP to do?
By Leah Hodgson, PitchBook
In the first nine months of 2023, only 81 debut VC vehicles closed, worth $6.1 billion in total, according to the Q3 2023 PitchBook-NVCA Venture Monitor, compared to 292 funds and $10.3 billion in 2022. Increasingly, capital has been flowing into larger, more established venture funds, underscoring the appeal of investors with long-term track records.
"The market dynamics over the last couple of years have changed the appetite of a lot of folks when it comes to VC," said Jeff Herbst, managing partner of GFT Ventures, which raised $140 million for its debut vehicle earlier this year. "But I personally think that now is the best time to be launching a VC fund. But it's not an easy thing to do, especially at the moment."
He said differentiation is key to launching your inaugural fund. With thousands of VC vehicles competing for capital and LPs less willing to commit, new managers need to find a way to stand out from the crowd.
Standout strategy
Investment strategy is a main way to differentiate, according to Herbst, as it helps potential LPs and founders understand what your fund is all about.
This includes outlining things like which sectors the fund will focus on, the stage, geographical preferences and what role the firm will play for its portfolio companies. Will you be a lead investor? What type of support will you provide portfolio companies? And so on.
A good way for a first-time manager to determine fund strategy, Herbst said, is to look at their own strengths first. In his case, he previously spent nearly 20 years at AI chipmaker Nvidia as vice president of business development, so it made sense for Palo Alto-based GFT to target frontier technologies including AI and autonomous machines.
"You need to have a good team," he said. "Having people with subject-matter expertise and investment expertise like we had allowed us to convince a lot more investors to give us money."
Choosing the right investment strategy is key, as it will color all subsequent decisions, said Nick de la Forge, partner at Berlin-based Planet A Ventures, whose €160 million (around $172 million) first fund closed in February.
This includes fund size. If a firm is looking to back deep-tech startups, then it will more likely aim to raise a larger amount than one that is targeting SaaS companies. Deciding the stage or role of the fund will also determine whether to build more follow-on capital into the vehicle.
Investment strategy also may factor into which LPs should be targeted. From government institutions to pension funds, VCs have a plethora of potential investors to consider. But researching those whose values align with your fund's mission is more likely to result in success.
Leveraging existing relationships in the VC and startup ecosystem can yield LPs, and it creates the potential for warm introductions to others in their own circles. Attending industry events for networking can also open doors. But building trust can take several months, so first-time managers should consider starting early when seeking out LPs.
"Fundraising is hard enough, so it makes sense to follow the leads you already have," de la Forge said. "But you also need to keep an open mind to other possibilities and figure out early on who is interested and who is just gathering information."
Experience as measure of success
Finding LPs may be difficult, but persuading them to commit to an unknown manager can be even harder. Being able to show relevant experience is essential.
"Without some kind of a track record, I think it's going to be hard to raise," de la Forge said. "Raising your first fund is a bit like assembling an airplane midair. LPs want to see what your investment thesis actually looks like and, at the end of the day, it's a game of confidence."
LPs will be looking to back funds that have a unique advantage to sourcing the best startups, particularly at the moment, de la Forge said. There is an advantage for those who already have experience working in VC or for founders-turned-operators who will bring a deeper knowledge of a specific sector. But there are other ways to show skill.
De la Forge noted one way to give LPs a preview is experience with warehouse investments—in which a manager invests in startups before forming the fund and then transfers the ownership once the vehicle is closed. Angel investing, either solo or as part of a syndicate, can also be another way to demonstrate a record, along with launching a micro-fund to serve as a stepping-stone to a larger vehicle. First-time managers may consider already having a plan for what they are going to invest to demonstrate to LPs the fund's strategy.
"[First-time fundraising] at the moment is more complex than it has been," de la Forge said. "I believe that there is more than enough money out there and more than enough LPs for every possible setup, but you need patience and resilience to make it through."