Improvements in capital raising performance have led to a resurgence in investor interest for venture capital funds. As a result, there has been an uptick in first-time and spin-off fund managers entering the space in an effort to capitalize on the institutional interest. While there is an opportunity for new managers to capture the outsized returns seen in the venture capital market, the fact that the fundraising market is currently home to more than 1,240 vehicles seeking investor capital is making things more difficult for new fund managers.
Additionally, successful venture capital investing involves high levels of skill, extensive resources and strong networks. A fundraising market that is competitive and actively expanding will put less experienced fund managers at a disadvantage, making it vital for fundraising efforts to be targeted at investors whose preferences and investment plans intersect specifically with each fund manager’s vision.
For managers lacking a track record, there can be some advantages if framed correctly. Preqin data shows that the performance of first-time venture capital funds can have a higher standard deviation than that of experienced fund managers, making the case that first-time or spin-off funds could satisfy certain institutional portfolios that account for higher levels of perceived risk. Given the nature of venture capital investing and how it fits into the larger private equity picture, there are certainly opportunities for fund managers to migrate from other areas of alternative assets successfully. Due to this, a makeshift track record can be established through performance at past firms.
Though there are certainly many challenges facing fundraising managers, given the appropriate tools and approach to institutional investors, fundraising success can be attained.
As of September 2016, more than 470 first-time or spin-off venture capital fund managers are raising capital worldwide. In itself, this indicates a significant amount of competition; within the context of the nearly 800 other venture capital vehicles managed by more experienced firms coming back to market, the task facing these fledgling firms appears even more daunting. How can these less experienced firms compete for investor attention and successfully raise institutional capital for the first time? Is gaining institutional support a realistic prospect with so many
more experienced managers on the road vying for new commitments? With a compelling proposition and the right strategy, we believe success is achievable.
Fuelled by significantly improved performance in more recent vintages, venture capital has undergone somewhat of a renaissance among institutional investors. Today, more than 4,200 investors tracked by Preqin are confirmed as actively investing in venture capital funds, or are considering investments in the next year. The good news for first time fund managers is that half of those investors have either committed to first time managers previously, or are open to making such commitments in the future.
How to Get Past the Lack of Track Record
Managers without a track record typically face greater obstacles on the road to fundraising success; however, when comparing the average performance (net IRR) of first-time versus experienced
venture capital fund managers, first-time managers actually outperformed the pool of experienced venture capital funds from 2006 to 2013. Family Offices, which have a high level of confidence in their selection ability, may be willing to take on this added risk in order to expose themselves to potentially high returns. More experienced investors with bigger programs are often able to combine their selection expertise with a large enough portfolio to achieve diversification and overcome the potential dangers of investing with a small number of untested managers.
Where a track record for a new entity is not available, it is helpful to demonstrate the past performance of individuals while at former companies or venture capital firms in terms that the LP will understand, including the IRR for previously managed vehicles and multiples achieved for prior investments. With the vast majority of first-time fund managers raising relatively
small vehicles, it may also be useful to highlight the potential advantages that smaller funds can bring, such as “small ball” strategies and micro VC opportunities. Managers that achieve
success are often those that are able to communicate the virtues of their fund and the smaller first-time fund landscape in its own right, rather than simply presenting themselves as the potential superstar brand name of the future.
Who Are The Investors?
While Preqin tracks investors across the entire spectrum seeking opportunities in first-time funds, some are more active than others. Family Offices and Foundations have historically been the most active investor type in first-time or spin-off venture capital funds, led especially by those based in North America, of which there are 222 known to have participated.
Where do I start?
where do I start? Identifying investors that may be a good fit for a fund based on past investment activity, preferences and future mandates is one of the primary qualifiers in any fundraising process, and hiring a Placement Agent that specializes in Emerging Managers is a good first steps, and there are some simple first steps that we advise our clients to consider when
hitting the road. For starters, simply identifying investor preferences can yield inroads to local investors with mandates for venture capital funds focused on investments in their home region. REO Capital, LLC is a Placement Agent that can help with Investor preferences and access to Family Offices and Foundations on a global basis.
Funds of Funds Are Good First Time Investors
Aside from the traditional LP-GP format, many funds of funds are highly active in the venture capital industry, and often look to capitalize on first-time fund upside potential. More than 200 fund of funds managers across 29 countries are considering or are investing in first-time venture capital managers. For example, Sun Mountain Capital, a New Mexico based fund of funds manager, is seeking to make commitments in the next 12 months to venture capital funds targeting Mexico and various US states, and could be a great lead for managers targeting these regions.
REO Capital, has relationships with Fund of Funds, Single Family Offices, Multi Family Offices, Foundations, Registered Investment Advisors – RIA firms, Private Investment Companies, and Wealth Management firms that all invest in first time Venture Capital Funds as well as Private Equity Funds.
For more information go to www.reocapitalllc.com or contact John Denes at 310-909-8727