As fundraising got tougher for venture firms in 2022, many feared emerging managers, which don’t have the same networks or track records that more established VCs have, would be hit disproportionately hard. While that rang true in 2022, this year, emerging managers fared better than they got credit for.
U.S. emerging managers raised $11 billion this year across 170 funds through the third quarter of 2023, according to data from PitchBook. Emerging funds are not on track to reach the $41 billion they raised in 2022, which was down 31% from 2021. While these numbers aren’t great, when you compare them with established managers, they start to look pretty good.
Established VCs raised $31 billion across 174 funds so far in 2023, according to PitchBook. This means established managers have only managed to raise four more funds this year than emerging managers. Despite fundraising being down across the board, emerging managers raised 26% of the total capital raised. This is up from 23% in 2022, which means as they raise more of the overall total, established managers are raising less.
Historically, emerging managers raise a similar percentage of the overall capital each year, said Vincent Harrison, a VC analyst at PitchBook. That means emerging managers are seeing as much success as usual in 2023; the numbers are just lower because the overall fundraising market is depressed.
Harrison said it isn’t surprising that emerging managers are still seeing success in a tighter fundraising market. Despite market conditions, these firms still offer LPs access to the asset class and focus areas within VC that larger managers don’t, he said.
“There are still some really interesting funds that either have access to really niche markets, or really fresh perspectives, or innovation,” Harrison said. “A lot of them are still very prominent.”
This rings true as many of the emerging managers who were still able to successfully close this year, especially those raising their first fund, were targeting strategies beyond generalist, and bringing different types of expertise to the table.
RevRoad Capital raised $61 million to focus on startups coming out of its accelerator, which are largely based in Utah. Level raised $104 million to back other VCs and the companies in their portfolios, too. Geek Ventures raised $23 million to back immigrant founders.
Emerging managers outside the U.S. — who wouldn’t be included in the PitchBook data — also targeted new areas. Yellow raised €30 million ($32 million) for startups located in less traditional tech hubs in Southern Europe like Italy and Portugal. Norrsken22 raised $205 million for its debut fund to invest in growth-stage startups in Africa.
A decrease in new emerging managers isn’t necessarily a bad thing. Back in 2020 and 2021, everyone wanted to be a founder or a VC. Many folks who just thought it would be fun, or didn’t really have the background or experience, were able to go out and raise funds from LPs. That doesn’t help the ecosystem.
VCs have a fiduciary duty to their investors to make them money. Startups on the flip side are looking to take money from investors who can help them beyond the check. Similar to the venture deal side, many emerging managers who raised in 2021 could only have raised in 2021, and that isn’t a good foundation for a successful firm.
“There is a lot more to being a fund manager than just raising the capital,” Harrison said. “It’s having the expertise to support portfolio companies, or other investors that may help them hit milestones. It’s a brutal awakening that [emerging managers] are having now. There are other things that you have to do and some are unwilling to do that, or simply can’t.”
All of this is good for the venture market heading into 2024. While Harrison, and seemingly no one in general, thinks that the fundraising market will have a substantial rebound in 2024, it’s refreshing to see that emerging managers, like VC deals, are just returning to normal market conditions. Good managers can still raise. Cutting out some of the tourist investors will be better for LPs and startups in the long run.
“I think a big takeaway is emerging managers aren’t going anywhere,” Harrison said. “LPs aren’t just the CALPERs of the world. There are a ton of thoughtful LPs out there who, yes, they want to have a financial return, and they are also thought leaders in the space and want to put their capital strategically into those spaces. Emerging managers in a lot of ways are a good way to do that.”