Fundraising as an Emerging Manager VC: The Ultimate Challenge

Founder’s think they have it hard.  It's 100x harder as an Emerging Manager VC

Part of my job is listening to founders complain about fundraising.  Fundraising is hard and not fun at the same time so I sympathize.  But they don’t know how lucky they are… 

If they really want to know fundraising pain, they should try raising for a Fund I as an emerging manager.  That’s where you move from the world of pretty hard into the world of wildly brutal. 

Story Time: The Struggle of an Emerging VC

A few months ago, I met up with a friend named Michael who I knew from back in my VC days.  He’s the founder of a company that exited a few years back who built an impressive track record investing in a couple unicorns as an angel.  He’s a smart guy with a great network who has the exact experience you’d want in an up and coming VC fund manager. 

I knew Michael was raising a new VC fund so I asked him how it was going.  He said, “I've raised $22M out of a goal of $25M and a $30M hard cap.”

(FYI: These are the words you use to signal great interest and momentum during fundraising)

I congratulated him on the progress. I said, “That’s awesome. You’re pretty much done!”

At that point he let down his guard to share the harsh reality of his fundraise. 

“I guess I’m close, but it doesn’t feel like it. I’ve been raising this fund for almost 2 years and I don’t know when I’ll be done.

Talk about brutal.  If a guy like that with that sort of background struggles, what do you think other emerging managers are doing?  It is a slog to raise a first fund…and it barely gets better until maybe Fund IV.  This is SO much worse than raising funds as a founder.  

I know it’s popular at times to bash all VCs, but to build some empathy, let’s walk through some of the challenges that the newest batch of investors face…

The Main Struggles Emerging VC Managers Face

1. Lack of Track Record
   If you’re an emerging VC, you’re facing a classic “chicken-and-egg” problem. You need trust to get capital, but you can’t build trust without a track record.  And to build a track record, well you need capital.  LPs, especially the more institutional ones like fund of funds, are notorious for being risk-averse.  Track records serve as CYA stories in case their investments in funds go south..
   
   This is a huge reason why it’s so hard to raise a first  - nobody knows you.

2. Insane Competition
   It’s not just that the cache of being a VC drives a ton of people who want to be VCs (and yes it does).  It’s that all these new VCs look so similar.  You have a few good logos on your resume, you know some generically interesting people, and you have some vanilla ideas on how to find great deals. The problem for new managers is that LPs have a massive pool of options that look so much like you. If you don’t have a clear differentiator, investors will likely stick with bigger names and closer relationship. 
3. 
   Easer said than done, but  emerging managers need to get creative and find their edge—whether it's a specific market they know better than anyone or a better introduction in, you’ve gotta stand out.
   
4. Goldilocks problem
   Another problem emerging VCs run into is the fund size dilemma. If you try to raise a fund that is too large, it might be too hard to get there.  A smaller fund size might be easier to raise, but if you go too small, you won’t have enough management fees to have enough support.  And while there are LPs with “emerging manager” programs, many of those only consider funds over $100M in size.  Seems large for an emerging manager!
   
   Hard to know what the “just right” size is and it must be really frustrating.

4. No momentum
   When you’re raising for a startup, there’s a tipping point that occurs when you land your lead investor.  I often say it’s like you’re dying of thirst and then you’re drowning.  It’s super hard at the beginning to find investors that want to invest but once a lead is in place everyone wants in and it’s way easier to finish a round with the momentum and credibility of a lead.
   
   This doesn’t really exist when raising for a fund.  Maybe when the fund is a 90% raised, there might be some momentum, but for the rest of the time it’s just a step by step slow march until you finally get to the finish line.  PAINFUL.
   
5. Massively long sales cycle
   Not only do you have the pleasure of never building momentum when raising as an emerging VC manager, you also have to endure crazy long sales cycles. If you were hoping to be introduced to a family office and get a commit next week like some founders are able to do, I’m going to have to disappoint you. 
   
   Family offices, one of the major sources of LP money for emerging managers, run on trust when making investments. They are bombarded with people who want access to their money so they are naturally distrusting.  It can take many meetings across many to earn the trust and investment of a family office. 
   
   I often tell fund managers, if they want longevity across multiple funds they have to realize they’re not only raising for Fund 1, they’re also raising for Fund 2. That’s how long some of these sales cycles can be!
   
6. Tons of work, no help
   If you couldn’t tell from steps 1-5, it takes a ton of work to raise capital for a new VC fund. And these emerging managers many times don’t have partners and certainly don’t have fundraising support staff.  This means all that work falls on the founding partner.  Unlike startups who have teams that are running the business while the CEO spends more time fundraising, an emerging manager only has themselves.  This means any minute they spend on fundraising is taken away from the company making process on investments

Thank god for being a founder :) 

For the founders reading, I hope you found a bit of compassion for your counterparts across the table.  This takes nothing away from the challenge of raising funding as a startup founder but you should thank your lucky stars that you’re a founder and not a VC!

Be chased,
Jason