After what felt like winter, investors say startup deals are back on — although the numbers suggest they never stopped. As Semil Shah of Haystack VC phrased it in a blog post, “It’s game on, pandemic or bust.”
This is good news for founders and big funds, but the investment landscape becomes more complicated when it comes to up-and-coming venture capitalists. “My impression of the current mood amongst traditional limited partners is that most have slowed down considerably in terms of net new investments, new relationships,” Shah told TechCrunch.
So rebound or not, we’re in a volatile time, and first-time fund managers are looking for unique ways to de-risk themselves.
One route: Put liquidity up high in your pitch deck. Moore Ventures, a new fund focused on investing in diverse teams working on sustainability, is experimenting with an unconventional fund structure. Instead of traditional ventures where returns come from multiple rounds of financing and an exit either through acquisition or IPO, Moore is concentrating on successful liquidity strategies throughout a portfolio company’s life.
Constant commercialization, if it works, could be music to a limited partner’s ears.
“Some will fall into the licensing model, some will be developing the product and then selling the design and manufacturing process to an existing company before expanding marketing and sales. Only if a company has the ability to expand its product base and scale will we plan to commercialize through the traditional company development process,” said Darius Sankey, a general partner at Moore Ventures.
When COVID-19 hit the United States, Sankey and first-time fund manager Melinda Moore watched their main investor put all investments on hold and consequently pause the close of their first fund.
The duo then pivoted with Moore Ventures to take on a completely different fund structure. It now uses special purpose vehicles on AngelList so it can invest through the pandemic without the support of institutional LPs and family offices. The co-partners hope that the structure will pay back all parties sooner than an average fund.
Beyond restructuring a fund, some investors are rightfully benefitting from an overdue trend: The venture capital community’s rush to support diverse founders and fund managers. Police brutality and the killing of George Floyd has led to a burst of attention from the VC community on diversity efforts. Earlier this week, billionaire Chris Sacca told new fund managers to take advantage of this momentum and get capital while it’s still available.
Shila Nieves Burney formalized Zane Venture Fund in November and got her first capital commitment from an investor in January. The fund, which was originally going to be $10 million fund but is now eyeing $25 million, invests in minority founders.
For Burney, change came from deal flow versus actual fund structure. She started building her deal flow before she even had a capital commitment. Through online forums and a pre-capital program, she created a network for 900 founders without the benefit of having a fund behind her.
The two years of front-loading work, Burney says, has made a difference when it comes to raising money now with LPs. She added that the recent attention given to diversity and Black founders has led to more investors, some of whom originally declined to invest in her fund or show interest.
The idea of diversity-focused funds is controversial, with some Black entrepreneurs saying they don’t want charity or donation-based funding.
“That’s the kind of noise I’m not paying attention to,” she said. “I have a mandate and invest in diverse entrepreneurs. I don’t care if the money you give me doesn’t come out of your main fund. I don’t care if it comes from a fund that no one knows about.”
When it comes to liquidity, limited partners often go to what has proven to bring in returns, like legacy firms. In a down market where risk is as high as ever, this retreat-of-sorts could threaten the diversity of new funds that pop up.
Thus, if Burney, or any new first-time fund manager, pull off closing their funds, it literally defies odds. A number of new investors have found that traction in 2020 is coming from high-net-worth individuals instead of offices or institutional investors.
One operator-turned-fund-manager, who spoke to us on the condition of anonymity because they are currently fundraising, says all 20 of their limited partners have recommitted to their fund after initially pausing new investments.
The investor said that their LP base is largely individual high-net-worth individuals instead of family offices, which is common when funds are small. Limited partners like pension funds, universities and family offices often decline to invest in first-time funds if the investment vehicle is too small.
Reliance on a single founder versus an institutional fund is fine for a first fund. These investors, however, will be met with struggles when raising a second fund down the road when looking for recommitments. Founders are more fickle than a family office. “Unless, of course, your first-time fund is Mary Meeker’s first time fund,” they said.
The different approaches by the new and rising venture community adds some reality to the market rebound. Normalcy in a time of volatility is always welcome. The real stress test is if this exciting rebound will benefit the same people as before or fundamentally make the entry to venture even harder than before.
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