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I’m going to keep emphasizing this chart to make sure everyone understands how difficult it is for Emerging Managers to raise a fund right now. Yes, we got carried away during 2020-2021 and are paying the price now, as I mentioned last week. However, there will be huge repercussions if the earliest and riskiest investors don't have the money to seed the startup environment.
There is no question that we’re going through a startup downturn right now; sadly, I believe this will continue for at least another year. At some point, we’re going to have to buy the proverbial dip and increase investments across the board as current startup runways come to an end. A lot of this has to do with the public markets, which are at all-time highs right now, ironically enough, though it’s mostly BIG Tech getting BIGGER. Unfortunately, while they’re at all-time highs, M&A activity is near historic lows, drying up all the liquidity needed to sustain our venture models. It’s a vicious cycle right now.
On top of that, we’re also basically in a Series A crunch. What’s that? Essentially, the investors after pre-seed and seed stages have increased their scrutiny, raised expectations, and tightened their checkbooks. At the beginning of 2023, they told my investments/founders and numerous others that they needed to get to $3-$5M ARR growing 100% YoY, but now they want $5M-$7M ARR. This is why we’re seeing so many Seed+, Seed II, bridges, and Pre-Series A rounds to buy more time to hit a moving goalpost. Everyone has their own business model.
That means early investors aren’t getting markups, and/or it’s taking longer, so MOIC (multiple on invested capital) and IRR are lower. This makes convincing LPs to invest in your next fund that much harder. Hence the data/tweet below:
The historical average graduation rate is approximately 45-55%, so this drop means hundreds of first-time funds will not be able to raise additional capital. Assuming each pre-seed/seed fund invests in 20-30 startups per fund, that’s 6,000-9,000 fewer investments (not entire rounds) over the next few years at the earliest stages.
Two final charts before we jump into the Q&A to get to know some Emerging Managers and support them. Statistically, smaller funds have a better chance of returning more money. Yes, it’s a bit skewed as smaller funds and earlier, lower valuations make it more likely that an investment will hit big. However, as I mentioned in the last post, while they have a higher ceiling, they also have a lower floor. Hence, bigger LPs tend to play it a bit safer since those alpha returns are still outliers.
https://www.linkedin.com/posts/jamesheathaca_vc-venturecapital-activity-7190981707615928320-Z7Ys/
And this one too, while it makes basically the same point as the above one, it goes to 2018 right after MASSIVE VC funds became more common place. Why? SoftBank launched their $100B Vision Fund in 2017 which changed the VC, Tech and public markets forever. Hence why we have 1000+ unicorns now.
Every major VC raised multi billion dollar funds
Private startups raised D, E, F etc rounds at $10-$100B valuations
They then stayed private longer, too expensive to acquire and delay going public, if at all, indefinitely
Lets meet 5 Emerging Managers!
**FYI I have no idea if any are raising or not / this isn’t a solicitation for investment and this is not an endorsement of any of them**
Everybody Ventures | Bruce Hamilton
We're uniquely positioned at the intersection of pop culture, consumer, and technology. Our difference lies in our:
Cultural relevance: We're obsessed with understanding what's next in pop culture and how it intersects with technology. We believe this gives us an edge in identifying and backing startups that are truly resonating with the next generation of consumers.
Consumer-first approach: We're focused on investing in startups that are solving real problems for everyday people. We're not just looking for tech for tech's sake – we're looking for solutions that make a meaningful impact on people's lives.
Network effects: Our portfolio companies benefit from our extensive network of relationships in the pop culture, consumer, and tech ecosystems. We're able to facilitate connections that drive growth and innovation.
Thematic investing: We're not just generalist investors – we're thematic investors. We have a deep understanding of the trends and drivers in the spaces we invest in, and we're able to identify opportunities that others might miss.
Coughdrop Capital | Stu Smith
How do you identify and evaluate potential investments?
We focus really heavily on velocity — velocity of engineering, velocity in GTM, velocity in growth of engagement/usage. It pains me when I see a product I like but then realize the founder has been working on it for 2+ years and it's still pre-revenue. It's hard for me to get conviction that a founder in that situation can suddenly rev the engine and build real momentum
Can you share a success story or a notable failure and what you learned from it?
We founded a startup together, raised a bunch of capital, and ultimately couldn't find product-market-fit and had to wind the company down. More than most of our successes, this made us stronger as investors and allows us to be in the shoes of founders who are faced with huge challenges.
What is your vision for the future of your fund, and how do you plan to achieve it?
We are building Coughdrop to become a leading seed firm that founders want on their cap table. We have deep experience as founders and operators. We've worked with a wide range of investors. We know what it looks like to be a value-add investor. Every firm says this but few actually accomplish it.
A100x VC | Nisa Amoils
What differentiates your fund from others in the market?
We are in a sector that often associates blockchain technology solely with crypto and speculation. We have focused on the real world use cases of the technology for years, backing entrepreneurs that want to solve real problems. There have been many funds focused solely on building the infrastructure and not many that understand applications like we do.
What value do you bring to portfolio companies beyond capital?
We have a television show called Business of BlockchAIn that airs on Bloomberg and Fox that features entrepreneurs solving real problems with the technology. We are involved with regulation and can advise on legal, audit, and other operations. As former entrepreneurs and having been in our sector for 8 years, we have a vast network for partnerships and capital.
Tenzing VC | Josh Oeding
What sectors or industries are you focusing on, and why?
We’re a B2B SaaS and FinTech fund. Software has been eating the world since before Marc pinned his note, and yet many industries are still ripe for the adoption of new technology or replacing antiquated systems that have sucked for years. Many industries have been a bit overlooked relative to enabling technologies, and the incumbent providers are stale.
How do you identify and evaluate potential investments?
I keep every door open for anybody to reach out at any time (website, Twitter, LinkedIn, email, etc). It does create a bit of noisy deal-flow, but I filter hard and fast before digging in. Referrals from other founders always get a full first look, as do introductions from trusted co-investors. As a B2B investor, a key early evaluation criterion is ROI for the customer.
How do you balance short-term performance with long-term value creation?
Feedback loops in venture are long, and short-term vanity metrics can be intoxicating, Thankfully I’ve been around long enough to have gotten drunk on hype in the past and try my best to focus on signs of true long-term success. I had the first close on Tenzing.vc Fund 1 in July of 2021 but only wrote two checks that year.
Earthling VC | Arian Ghashghai
What differentiates your fund from others in the market?
I wedged myself into the market as an angel (and ex-AI engineer at Meta RL, working primarily on their AR program and investing directly in that space). There are 2 things I learned from that:
I'm the only manager who both built and is explicitly venture investing in this exact space (in the US at least) which opened a lot of doors with relationship building as a resident expert in the space
What is your vision for the future of your fund, and how do you plan to achieve it?
Given that at this point I have no aspiration to grow into a megafund (or even believe at this stage that I could) the goal is to cement our specialist fund status. As mentioned, our current wedge is pre-seed VR for which I personally am already recognized — for Fund I, the goal is to firmly cement ourselves as the best VR fund in the world (the gap is totally there for us, and no one better than us to fill it). Thinking forward, using our VR prowess as a wedge, the goal is to progressively concentrically grow the mandate.
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