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Emerging Managers and Fundraising during a Pandemic

Emerging managers and Fundraising during a Pandemic are key players in the venture capital (VC) space, with the potential to steer founders to successful exits and deliver significant returns for investors. To cement their position as a powerful segment of the venture community, emerging managers need to maintain momentum as they work to successfully close Fund I.
On average, emerging managers take 19 months to successfully raise a fund.

The State of the Industry According to a First Republic Bank benchmark analysis, 46% of emerging managers are in Fund I, while around a third are in Fund II and less than a fifth are in Fund III.
The median Fund II size is $50 million, twice the size of the median Fund I, and the average Fund II size is $125 million. That’s a trend that’s set to continue: Six out of 10 survey respondents say they planned to raise over $50 million for their Fund II, and over a quarter were targeting upwards of $100 million. Still, it’s important not to aim high simply for the sake of it. “Don’t oversize your fund or set unrealistic expectations,” advises First Republic Bank’s Hana Yang. “And if you do end up sizing up for Fund II, be ready to answer some questions. Are you going to add more partners? What about your strategy is changing, and why?” Both panelists and emerging managers acknowledge that raising large sums amidst an ongoing pandemic brings significant challenges. “COVID really put a damper on our fundraising,” says Mighty Capital’s SC Moatti. “We raised our first fund in six months or less, and it was more than 30% oversubscribed. With our second fund, everything went silent for a few months, and then in the fall, things started to pick up again. We added probably nine months to our fundraising just because of COVID.” For many emerging VC firms, the big question is whether it’s best to push ahead with a planned second fund, or postpone their plans until normal business is resumed. “Raising now is a big challenge — whereas if you can postpone your raise by, say, nine months, then it’s going to be a lot more possible to have those in-person meetings,”

Should you hit pause?

Fundraising is never easy, but for emerging managers, the COVID-19 crisis has brought new challenges. With reduced scope for industry events and in-person meetings, it’s harder than ever to catch the attention of investors and build relationships with LPs. Panelists acknowledge that it’s hard maintaining existing relationships with LPs and founders during the coronavirus crisis, and that trying to establish rapport with a new investor over Zoom is harder still. “There’s no rule book for raising capital during a pandemic,” says Bridget Schweihs, Vice President at 50 South Capital. “But as much as you can, you should wait until things are back to normal, and you can meet LPs in person, because it is such a relationship-focused business. Being able to develop a rapport, get to know each other and build trust is very important.” Still, emerging managers should be wary of halting their efforts altogether. To build a lasting firm with staying power, it’s important to maintain a steady fundraising cadence so both existing and prospective LPs can see that you’re sticking to your core strategy even in the face of adversity. “Getting into a cadence really means consistently and continuously building your firm,” explains Moatti. “Most of our Fund I LPs followed on into Fund II, which was really important to us. And not only did they follow on, but they often increased their commitments and referred other people.” Be prepared to tweak your timeline if necessary, but keep your eyes on the prize, and don’t abandon your
original vision for your firm.

Strategies for Success
Emerging managers are clear-eyed about the challenges they face as they work to close their Fund IIs, with almost a third saying that finding ways to deliver high returns for investors is the single biggest factor on their radar. A quarter of managers say that developing and articulating a clear and unique value proposition, based either on their fund’s approach or their own personal background, is critical as they seek to win over LPs. And 16% of survey respondents say that building relationships with LPs is their single biggest challenge. Such concerns are valid, panelists agree. But they are also solvable problems — as long as emerging managers approach them with determination, creativity and a clear battle plan. The panel discussion highlighted three key areas where managers can work to overcome their challenges and pave the way for a successful Fund I:

1. Nurture relationships.
There’s no getting around it: building relationships in the COVID era isn’t easy, with reduced opportunities for networking and fewer LPs taking in-person meetings. It can be especially tough to break through with the institutional and corporate LPs. In fact, as much as 67% of emerging managers’ main source of capital comes from family offices and high net worth individuals (HNWIs).
To overcome such challenges, it’s important to make the most of the connections you do have. If an HNWI helped you to launch your first fund, don’t be shy about asking for help:
They may have friends and colleagues they can connect you with as you run your fundraising process. Mentors and co-investors in your portfolio companies can also help you to get your foot in the
door with a new HNWI LP. When it comes to sparking an LP’s interest, there’s nothing better than a “warm introduction” from a respected industry bigwig, says Bridget Schweihs. So work your
contacts, and reach out to both investors and mentors to see if they can help you break through. Besides mentors and industry bigwigs, make sure you’re able to source strong references from your founders. And don’t overlook the importance of your peer network. Formal or informal references from other emerging managers carry plenty of weight with LPs, says Kesha Cash. “The space is small, and people talk,” she explains. “There are a lot of conversations that are had before an institution moves money into your fund.”

Conclusion: Keep Looking to the Future
Few emerging managers enter the VC game intending to launch only a single fund. Instead, managers envision closing a series of successful funds, growing a continuing pipeline of new startups, and building a venture brand with long-term staying power. To achieve that, panelists say, managers need to maintain momentum even during difficult times. Closing your Fund II in the midst of a pandemic might not be straightforward, but it’s important to keep planning for the future, building relationships and working to win over LPs. Emerging managers are the future of the venture industry. But to achieve their potential, managers need to stay focused and keep working to grow their firms. By playing to their unique strengths, and approaching challenges with creativity and determination, today’s emerging managers can bring their Fund IIs to fruition, and lay the groundwork for continuing success.


First Time Funds
First Time Funds

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