Everyone remembers their first time-the nervous anticipation, the performance anxiety and the nagging question: Will I be respected afterward? We’re speaking, of course, about raising a first-time venture capital fund.
First-time funds aren’t necessarily raised by first-time managers. Rather, they’re raised by new venture firms, which are more likely than ever to be run by experienced general partners. In the past year, many seasoned GPs have turned free agents, as established firms have returned to the fund-raising market and restructured partnerships. The restructuring has resulted in several partners leaving top-tier firms-voluntarily or otherwise-and opening their own shops.
Case in point: Rob Coneybeer, Tod Francis, and Ravi Mohan last year exited New Enterprise Associates, Trinity Ventures, and Battery Ventures, respectively, as those firms prepared to hit the fund-raising trail. Shortly afterward, the trio formed an as-yet-unnamed firm that will begin raising a first-time fund this summer. The partners are no rookies. Collectively, they have returned $1.2 billion on $400 million of invested capital over the past decade, says Mac Hofeditz, a partner at Probitas Partners, the new firm’s San Francisco-based placement agent.
New firms are also spinning out of banks and corporations, which often have an early bead on under-funded niches in their industries. One example is New York-based HealthPoint Partners, which was launched last year by health-care merchant bank HealthPoint LLC. “They brought us a model which we thought had high potential: a targeted investment in orthopedic devices that are going to be much in demand as America gets older,” says Jon Bauman, executive director at the Teachers’ Retirement System of the State of Illinois, which allocated $20 million to the new firm’s $200 million fund.
Institutional investors are increasingly on the lookout for promising first-time fund managers. As fund sizes shrink among top-tier firms, pension funds and endowments have fewer places to put their money. Therefore, many of them have started “emerging manager” programs in hopes of discovering the next Kleiner Perkins Caufield & Byers or Sequoia Capital. The California State Teachers Retirement System led the way last year by announcing it would allocate $100 million to “new and next generation” private equity firms over a 10-year period.
But for most new firms, the increased interest hasn’t made raising a first-time fund much easier. “Most people don’t do first-time funds because it’s too much work,” says Erica Bushner, managing director at GKM Generation Funds, a fund-of-funds. Many investors would rather go with a known entity than slog through due-diligence reports on three managers with disparate track records.
For that reason, raising a first-time fund typically takes more than a year. That may seem especially long, considering many funds were raised in a matter of weeks during the Bubble, but that’s the kind of time VCs had to spend fund-raising before the heady days of the Internet. For example, it took Novak Biddle Venture Partners nine months to raise its first fund back in 1997 – and that was for just $30 million. It needed a mere five days to lock up $150 million for its fourth fund this year, but that’s to be expected for a firm that has returned in excess of 50% on all three of its previous funds (