It can be hard for emerging venture managers to get on institutional investors’ radars. Many LPs already have long-term relationships in the asset class, and these investors frequently have lean teams with a long list of investment criteria. But as venture fundraising continues to slow, now may be the perfect time for emerging managers to get their foot in the door.
Over the past few weeks, I’ve written about the state of venture fundraising in what’s shaping up to be a weird year. While institutional investors aren’t pulling back from venture, overall firm fundraising is slowing down. Because of this, LPs may not have as much cash on hand as before but they may have something more important — time.
John Coelho, a partner at asset manager StepStone Group, told TechCrunch that because many LPs aren’t spending as much energy on making and sourcing commitments in this slower fundraising period, now is a great time for emerging managers to start connecting with institutional investors, building relationships for potential future checks.
“We saw this during the Lehman crisis,” Coelho said. “Emerging managers used that dislocation to go out and build relationships with the most access-constrained group. Some folks are pulling back. Fundraising is slowing down. Start calling on these groups to build a relationship. They are more open to that than they have been for five years.”
Kyle Stanford, an analyst at PitchBook, agreed, noting that LPs aren’t spending as much time on fund due diligence today as in past years — it’s likely they already cut checks to their existing fund relationships earlier this year or in 2021 — and may actually have time on their calendars for once.
“From an emerging manager standpoint, probably no better time than now,” he said. “I again have been surprised by how much emerging mangers have raised.”
While emerging managers should take advantage of this opportunity, there are some things to keep in mind as they head out to pitch. For one, get real. Sara Zulkosky, a co-founder and managing partner at Recast Capital, a fund of funds focused on emerging managers that also helps them raise, said that emerging managers should stay realistic.
Institutional investors, especially large ones, generally have a minimum investment size or criteria around what kinds of areas they will invest in. Zulkosky recommends that emerging managers execute research either through a database that tracks commitments or by reaching out to folks that have gotten investment from the LP before to get a feel of what they are looking for. It’s definitely not a good use of time to pitch an LP that couldn’t invest in a firm’s future fund unless it was 5x bigger.
“Take a common-sense approach to relationship building,” she said. “Some of these organizations are not going to be a target. Try to concentrate time on those that are more actionable and effective.”
She added that when these emerging VCs go to pitch institutional investors, the most important thing for them to highlight to potential backers is why their firm and team are the best to pursue the strategy in addition to what the overall future plans are for the firm.
However, the big question that remains is how this fundraising market will impact the emerging managers who are currently in-market trying to collect commitments.
While Stanford said he’s been surprised by how much emerging managers have raised this year, according to the data he tracks at PitchBook, many are seeing significant troubles reaching even a first close, according to Kari Harris, an attorney at Mintz focused on fundraising.
If broader fundraising continues to slow down heading into Q4, I’m curious if this LP dynamic will end up helping get funds currently in-market over the line, too.