Emerging managers have been on the same roller coaster as startups for the last few years. Funding to these young firms swelled in 2021 as venture was hot overall, but in line with the broader market, fundraising has slowed to a trickle since the beginning of 2022.
The trend continued into 2023. New data from PitchBook shows that U.S.-based emerging managers raised a collective $1.62 billion in Q1. This doesn’t put this group on track to reach the volume seen in 2022, which was $37.26 billion. That was already down from the $55.81 billion the year prior. Experienced managers raised more than $10 billion in Q1 2023.
Emerging managers raised 14% of the total capital raised, which is the lowest percentage in years. Vincent Harrison, a venture analyst at PitchBook, said it doesn’t look like the tough environment for emerging managers will let up anytime soon, either.
“This is somewhat to be expected; 2022 was a rough year,” he told TechCrunch+. “The market is so reactionary. As things went down in the public market, people naturally were more cautious. Given that it’s a risky asset class, it affects people’s willingness to put money into it.”
But, I don’t know, I just can’t seem to shake my optimism about these young investors.
I was at a happy hour for emerging managers last week, and the mood couldn’t have been lighter. Every manager I asked about fundraising said it was tough, but they knew it would be. Those on their second fund said it wasn’t noticeably any harder than raising their first.
It’s not that $1.62 billion is a great haul by any means. But when you look at the number of funds that closed, as opposed to the amount raised, you get a slightly different picture. PitchBook data shows that 45 funds raised by emerging managers were closed in Q1 compared to 54 by established managers. That means nearly half of funds raised in Q1 were by emerging managers.
Another thing to consider is that larger funds aren’t always better — especially in today’s quieter market. Deal sizes are dropping at every stage except seed, which saw a modest bump, according to the same PitchBook data, and deals aren’t happening as quickly. That means that firms don’t need to cut checks as large or as hurriedly as they would have felt pressured to in 2021. Smaller funds are also more likely to get better returns than their larger counterparts. There is still a lot happening worth getting excited about.
Just this week, Kristina Simmons, a former Lululemon operator and former VC at both Andreesen Horowtiz and Khosla Ventures, closed on $20 million for Overwater Ventures’ first fund. It invests in early-stage startups with the goal of turning research and development projects into commercial businesses.
Simmons told TechCrunch+ that she started fundraising at the end of 2021, and despite the downturn not officially starting for a few months, it was still hard and got even harder as time went on. She said that even with LP introductions from her past venture firms and taking five LP meetings a day for months, it wasn’t remotely easy.
“Even with my experience in leading rounds, warehousing deals and trying to get creative, it was very difficult,” Simmons said. “Ninety-nine percent of the people I talked to either no longer had capital to deploy, or some of them had new investing freezes.”
But she and others have still prevailed in this market: Phenomenal Ventures closed a $6 million debut fund in February. In January, Cake Ventures closed on a $17 million fund. This week, MetaVC raised $62 million for its first fund.
What these funds show is that there is absolutely still LP interest in new managers, even if they aren’t raising lofty totals. It also shows that LPs are still cutting checks to funds led by women, people of color and people who don’t come with an impressive pedigree.
And, for what it’s worth, there are still people throwing their hats in the ring to become emerging managers. Joel Palathinkal, the founder of Sutton Capital, an accelerator program for emerging managers, said that while he has seen the firms he works with decreasing their target size, firms are still looking to launch — and they aren’t just piling into hot categories like AI to do so.
Of course the road for emerging managers will likely remain challenging for a while, and at the end of the day, being optimistic about an idea doesn’t write the checks. But I truly believe this, too, will pass. And in any case, the most interesting firms of today arose from tougher markets.