Michael Cardamone is CEO and Managing Partner at Forum Ventures.
Almost 500 meetings. That is the figure cited by an acquaintance of mine when we were talking about the number of conversations it took for him to raise his first venture capital (VC) fund. The explosion of seed funds over the last three years means limited partners (LPs) are flooded with options, making it hard to stand out. This leads to emerging managers taking anywhere from six to 18 months to raise the necessary funding.
In the present down market, I am seeing the flight-to-safety mentality dominating. One large foundation made it clear to me that their appetite is only for brand-name funds that are perceived as lower risk. LPs do not want to take the risk on emerging managers in this market. Understandably then, raising venture capital from family offices is now the primary target of 46% of emerging managers.
Therefore, I believe that the most pressing issue for emerging managers is not just landing a first meeting but standing out when they do. Drawing on my experience working with LP partners, there are a number of approaches that are more likely to get their attention. But first, it is useful to understand the market context in which funds are operating.
Why Is the Current Climate So Difficult?
The well-known institutional LPs that everyone pursues are really only adding a few managers per year, so emerging managers are now increasingly focusing on alternatives. Part of the problem, however, is the opaqueness of the LP market. Many family offices do not have websites, and it is often hard to know which high-net-worth individuals invest in funds.
So building the top of the funnel becomes a blocking-and-tackling exercise of first finding these private investors and then getting them to agree to a meeting.
The second issue is fewer people are investing in illiquid, higher-risk investments in a market with higher interest rates. With institutional funds prioritizing safer options, the proportion of capital raised by emerging managers dropped from 33% in 2021 to less than 15% in the latter quarters of 2022. And as fewer emerging managers have the capital to deploy and large multi-stage funds re-trench a bit, we’re seeing the impact trickle down into a decrease in funding for startups. AngelList’s report for the first quarter of this year showed the lowest rate of investment activity that it had ever measured.
Lastly, funds are finding it more difficult to differentiate themselves from so much competition. The prospect is especially daunting for relatively new emerging managers.
How To Combat The Challenges
Almost everyone who raises a fund for the first time has to leverage their network to get started. In my experience, the best approach is to be very specific about asking your existing LPs for introductions to people they have co-invested with in the past. But I recommend that you only ask for one or two connections so it does not appear as an open-ended request and it is easy for them to facilitate the introduction by providing a forwardable email.
You can also ask general partners at more established firms that have co-invested with you and will speak highly of you for introductions to one or two of their LPs. Lastly, if founders or other general partners (GPs) are connected to LPs you are mid-process with, it could make sense to have some of them proactively back-channel with the LP to share their experience working with you as an investor.
Also, do not neglect LinkedIn. You can use the networking platform to find family office contacts who are connected to other fund managers. If someone at a family office has mutual connections with other GPs or emerging managers you know, they are likely to be investing in emerging managers and are, therefore, a potential target LP. In fact, I have a high hit rate of finding the right people with this approach. It is then a matter of determining if the mutual connection is strong enough to earn an introduction.
What Gets LPs Excited To Invest
To stand out in a crowded marketplace, after working and talking to a number of LPs, I can say that family offices tend to value a historical track record of success—both investment and operating—and the demonstrated ability to replicate and iterate their strategy for ongoing success.
LPs want to hear a strong articulation of how managers will apply that winning mentality to building a new fund. As a note, I have a higher close rate when meeting in person rather than on Zoom and phone calls, so to me, at least, these conversations should likely take place face to face whenever possible.
A lot of family offices are interested in investing directly in companies, so they leverage their relationships with fund managers to get a deal flow for later-stage direct deals. That is why they often want to know an emerging manager’s history with co-investments, using SPVs, and if they have ever pulled in family offices directly.
Many LPs I work with also think it’s important for emerging managers to show a willingness to get to know them as individuals and as a team. Some family offices and high-net-worth individuals also want to feel like they are part of a community of other LPs, favoring managers who can emphasize the quality and reach of their network and relationships.
Standing Out In A Bearish Market
The due diligence process is longer than ever, so emerging managers need to understand the goals of target LPs and align them with their values and areas of interest. If an LP cares a lot about direct deals, send them a deal that might work for them ahead of time as a way of showing how you structure investments and then build the relationship from there.
Overall, I find that high-net-worth individuals and family offices represent a better bet right now, and introductions are the ideal vehicle to distinguish your fund. Be prepared to build trust in your investment process, thesis and differentiated access to investment opportunities. Even in a bearish market, I believe emerging managers can stand out if they leverage their network effectively.
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