A tale of two covid-era fundraising experiences

The pandemic has upended the fundraising process, but LPs look to adapt to the new virtual processes in 2021. That should benefit established brands as well as newcomers.

It was the best of times and the worst of times for fundraisers in 2020.

Many emerging managers, by and large, had difficulty raising newer funds amid the pandemic as LPs pulled back from signing off on new commitments in GP fund managers they knew little about.

Meanwhile, mega funds collected ever-larger sums in 2020, with Andreessen Horowitz, General Catalyst and Tiger Global among the huge fundraisers in the year.

“There’s plenty of funds to invest in and a lot of funds came back to market quickly in 2020,” an LP recently told Venture Capital Journal. The source noted that a lot of the venture funds he saw were oversubscribed, and that “there’s lots of capital available to invest.”

But, anecdotally, emerging managers have repeatedly told VCJ in recent months that it was hard to secure commitments – and the reason they all pointed to was the impact of the pandemic. Since it was hard to meet LPs face to face under quarantine restrictions, many investors decided to hold off on commitments to new fund managers, especially those they had no prior relationship with.

2021 outlook

However, that trend may not continue in 2021.

More than 90 percent of LPs are prepared to conduct initial meetings with GPs virtually in the wake of the onset of covid-19, according to VCJ’s LP Perspectives 2021 Study.

In addition, two-thirds of investors said they will conduct fund due diligence on an entirely virtual basis, while slightly more than half – or 52 percent – said in the latest annual study that they would now be more receptive to investing in fund managers if they never met face to face.

This is notable, considering the ongoing challenges the venture community began to face in 2020.

In a separate question in VCJ’s Perspectives Study, LP respondents said the difficulty in due diligence was not a main factor in putting money to work in the venture asset class, with only 8 percent citing that as a challenge.

LPs said that the inability to secure allocations to the best funds is their main challenge. This is consistent with the anecdotal information about how new managers had trouble securing fund commitments in 2020. Since they don’t have a track record, they’re not on the radar screen of most LPs, which are focused on getting into the better-performing funds.

Separately, only 15 percent of respondents said they are more likely to invest in first-time managers in the next 12 months compared with the previous 12 months. However, 19 percent said they are less likely, meaning the challenges young firms that are fundraising may continue to encounter difficulties.

Established firms win out

“It will be a lot easier if you have an established brand,” said Robert Ackerman, founder and managing director of venture firm AllegisCyber Capital, and co-founder of DataTribe, a cybersecurity start-up foundry in metropolitan Washington, DC.

Ackerman, who is in fundraising mode for DataTribe, said investing is all about establishing a rapport.

VC Robert Ackerman, AllegisCyber
Robert Ackerman, DataTribe

“LPs want to talk to VCs in person, hear their ideas and build a relationship, which is hard virtually,” Ackerman said. “But we’re talking to investors we’ve known for a while and that benefit of having a prior relationship really helps builds tailwinds for when you’re fundraising.”

Ackerman predicts the trend of emerging managers having difficulty to close on commitments will reverse in the new year. He expects to see significant signs of that 18 months after the onset of the pandemic, which would be in the fall.

“LPs are deploying capital, and if you have some differentiation, like how we invest in cybersecurity, they will come around and invest,” he said. “But that trust takes time.”