The first half of 2022 broke fundraising records at VC firms, but at the same time, pretty much everyone we spoke to expected fundraising to slow to a trickle by the end of the year. And while it is slowing down, fundraising is also getting really weird.
By weird, I mean largely unpredictable. According to Kari Harris, an attorney focused on firm fundraising at Mintz, while fundraising remains relatively healthy overall — GPs still have the upper hand in negotiations with LPs, which, to her, is a good sign — it’s slowed for many.
“I have seen an extension in the period of time from launch to initial fund close,” Harris said. “It’s taking longer for funds to get raised.”
PitchBook data backs up Harris’ statement. Kyle Stanford, a senior analyst at PitchBook, told me that fundraising data through August indicates that fundraising in Q3 will most likely be lower than Q2, which marked a steep drop from Q1.
And yet, a number of venture funds have been able to raise at lightning speeds this year, even during the summer, which is traditionally a slower time for fundraising regardless of macroeconomic conditions.
“We are hearing funds that just decided to raise in Q1 have already closed their fund, which we were not expecting,” Stanford said. “It’s not what I would have expected from LPs to be readily investing in these VC funds.”
Last Wednesday, we noted that Countdown Capital raised $15 million for its Fund II in about six weeks, less than half the time it took to raise its $3 million Fund I, even amid the fundraising frenzy last year.
In August, I covered Upper90 and its new fund’s $180 million first close after six weeks. I also just caught up with Chalo Ventures, which raised two funds totaling $80 million since May.
According to Harris, in a slower fundraising market, it is common for there to be a greater disparity between the winners and losers. So what is the secret sauce these “winners” are using to do well?
Both Countdown Capital and Upper90 attributed their fast raises to their track record.
Jai Malik, the founder of Countdown Capital, said raising in a poor economic environment “was definitely easier and faster.”
“We closed the bulk of the fund within six to eight weeks. The biggest thing for us is that we had a track record. It’s very hard to disagree with the investments we’ve made, which helps us.”
Harris said this lines up with what she is seeing. She added that any firm coming to market with a portfolio that includes a few exits and unicorns in past funds is going to have a significantly easier time in the current market, where LPs are being a bit choosier. However, she said this dynamic does hurt emerging managers that don’t have a track record to tout yet.
But Countdown Capital and Chalo Ventures have more going on for them than just their pedigree: differentiation.
Chalo Ventures, which focuses on early-stage startups in Pakistan, gets LP interest because it targets a niche market, which allows its investors to differentiate their portfolio, its founder and general partner, Haris Khurshid, said.
“The U.S. market is getting saturated,” Khurshid told TechCrunch. “Over the past couple of years, and especially the last two years, it led to inflated valuations. In a country like Pakistan, it is one company tackling a problem rather than many. You are betting on the business model, not multiple companies doing the same thing.”
Countdown Capital sets itself apart by focusing on pre-seed investing in capital-intensive hard-tech startups and in the industrials sector, which has hot categories like supply chain and manufacturing.
Justin Lopas, one of the firm’s LPs and head of manufacturing at Anduril, told TechCrunch that he was instantly intrigued because Countdown was the only firm tackling that area at the pre-seed stage.
So what does all of this mean for firms that are still raising or considering marketing themselves this year? Well, it’s definitely encouraging to see that LPs are still willing to back emerging investors and firms focused on emerging markets.
Plus, it appears firms are still looking to diversify, which shows that it is not a true flight to familiar grounds. That is also a good sign, especially for firms with a unique thesis or background.
Fundraising will likely pick up over the next few weeks — Harris said it was the slowest summer she’s ever worked — but the fall looks like it could get really interesting.