Emerging managers shouldn’t rush a first close – even in this market

Fundraising has gotten increasingly tough over the last year for funds of all stripes, and especially so for emerging managers. In the first quarter of 2023, venture firms led by up-and-coming managers raised $1.62 billion, a mere 13% of the total capital raised in the U.S., according to PitchBook.

Emerging managers and new funds out in the market may find it tempting in this macro environment to hold a first close as soon as LP capital is in the door. But that may not be the best strategy in the long run.

Holding a first close comes with a lot of nuance and shouldn’t be rushed, feels Kari Harris, a partner at law firm Mintz who advises VC firms on fundraising. According to Harris, while holding a first close allows a firm to start charging management fees and can be perceived as a vote of confidence to draw in institutional or larger LPs, doing it too early may result in avoidable issues down the road.

Getting the first close timing right is important for a few reasons. For one, that is when a firm’s partnership agreement starts and kicks off a fund’s investment period. So, a firm should plan to be ready to start backing deals immediately after the first close to make the most of its investment period and avoid having to amend it down the line.

Harris’ biggest piece of advice is to make a plan or schedule for the fundraising process and future closes but keep the timeline relatively vague when talking to potential backers. However, she doesn’t mean you should be deceptive — rather, firms should ensure they don’t put themselves on timelines they won’t be able to make.

“If you set a date, you will miss it,” Harris said. “You will retreat and have to go back to the market, and it will look like you failed.”

She instead suggests firms should give a realistic range that they can aim for. A good idea would be to say you’ll close at the beginning or end of the year, or during a certain quarter, so prospective LPs have a timeline that doesn’t put the firm into a crunch.

Harris said firms can use a few milestones to make it easier to decide when to hold a first close.

For one, firms should wait until they have a meaningful amount of capital to close on, depending on the size of the fund and the types of deals it is going after. For Harris, that means an amount that will generate enough in management fees to sustain the fund while also being enough to start investing. So while a $5 million close wouldn’t make sense for a $100 million fund, it could be the right amount for a firm targeting $30 million.

Angelina Hu, a director at Coolwater Capital, which helps coach and launch emerging managers, said firms should pick an amount that will allow them to maintain fundraising momentum while offering positive signals to prospective LPs.

Harris said firms should try to have a prospective deal in the pipeline, too.

“If you are not even close to doing a deal in your pipeline, you might lose six months of your investment period all of a sudden,” Harris said. “You might have to scramble to seek LP approval to extend it or quickly rush through some deals.”

Harris said emerging managers shouldn’t stress over trying to raise capital as quickly as they can in this market. A few years ago, most firms had fundraising periods of 12 months, but she feels that time span has been extended in this slower market to 18 to 24 months.

Of course, there is nuance to all this advice. Harris said if an emerging manager gets an offer from a large LP or a potential anchor, it could make sense to speed up the timeline or close on a smaller amount of money if that could boost the rest of the process.

“If you can get that first investor through diligence and [get them] ready to close, jump on it and close, even if they are not huge,” Harris said. “If they are going to help incentivize all of your other investors and actually send in their documents, [you should] absolutely close.”