Funds in registration: For smaller funds seeking capital, LPs waiting to see what the fall might bring

Venture fundraising in early 2016 was robust, and many firms are still looking for fresh commitments for their vehicles. But for emerging managers, the new folks on the block trying to make their names and hit their fundraising targets, the second half is looking increasingly cloudy.

The November U.S. election, an uncertain economic outlook, and an abundance of new funds trying to raise money have prompted many limited partners to take a step back, according to a VCJ analysis of regulatory filings and interviews with VCs. 

The concern is particularly acute in the particularly risky seed sector, wherein LPs prefer to put their dollars with the general partners they know rather than back new and untested shops.

“The seed-stage market is becoming saturated with new funds, and there’s no argument for LPs to back the new ones unless they know the manager,” said one well-connected seed-stage venture capitalist, who asked to remain anonymous since he works with a lot of VCs and LPs. “There are so many seed funds in the market, it doesn’t make sense for LPs to keep backing them.”

This VC says a number of LPs have contacted him to check the references of new seed-stage investors who are in the market and pitching their funds. He said the LPs are hesitating to back the emerging managers unless the founders spun out of firms they know.

It’s not as if no money is out there and flowing. No fewer than five U.S.-based billion-dollar venture funds closed through June, pushing first-half fundraising up 23 percent to more than $23 billion, compared with $18.7 billion in the year-earlier period, Thomson Reuters data shows.

Among the seed-stage firms that closed in recent weeks are Palo Alto, California-based Pear, which raised $75 million for its second fund; and Susa Ventures of San Francisco, which closed a $50 million second seed fund, double the size of its first one.

Examining regulatory filings from the past several months, VCJ found 77 funds ranging from seed-stage to growth and opportunity vehicles that are aiming to raise more than $8.7 billion in total commitments.

Among those currently in the market are Revel Partners. The New York firm has raised $20 million of a targeted $50 million second fund, Revel Venture Fund II. (See accompanying table.)

Also aiming to raise a seed-focused fund is True Wealth Ventures. The Austin, Texas, firm has raised $4.7 million of a $20-million-targeted inaugural fund, according to an August filing.

And additional fund closings are certainly imminent. A spokeswoman for an early-stage investor in Silicon Valley said the fund closed a couple of months ago, but the firm is waiting until early fall to make the announcement.

However, a venture capitalist who is raising a $100 million early-stage fund with other GPs told VCJ the firm has raised less than half the pool, is making investments and is close to announcing an exit. The VC, whose firm is bicoastal, said he doesn’t expect to finish raising the fund this year.

Although he’s pitching family offices and endowments, many of which have programs to back emerging managers, he said LPs are choosing to re-up with current emerging managers in their portfolios rather than back new ones.

“We’re going to have to wait until next year for many of the money managers to come around again,” he said.

Chris Douvos, managing director at the fund-of-funds Venture Investment Associates, noted that many GPs are “still pitching their hearts out” and that a lot of funds are in the market.

But uncertainty is thick, he said, given the U.S. national election and what the outcome might bode for the economy. And he questioned whether liquidity will improve enough so LPs can recycle distributions into new funds. Douvos also wonders whether venture deployment will slow more in 2017.

Douvos said LPs remain interested in smaller funds and micro-VCs that are still in play. But he adds that “there’s a ton of noise in the market and a small-fund strategy is tough to execute.”

“LPs have had an extremely active few years and many are financially and psychologically spent,” he wrote in an email. “Everyone is holding their breath to see what the fall might bring. I just don’t think there’s enough good deal flow to go around.”

Large funds have dominated the fundraising landscape. Five funds in 1H 2016 – Andreessen Horowitz, Founders Fund, Norwest Venture Partners, Accel and Kleiner Perkins Caufield & Byers – raised more than $1 billion each. What’s more, the top 10 largest funds collectively raised more than $9.9 billion, or 43 percent of the total.

In the third quarter, Technology Crossover Ventures closed on $2.5 billion, the largest VC fund this year. That pushed the year’s fundraising through mid-August past $28.3 billion, indicating that 2016’s total will overtake the $29 billion raised last year. 

VCJ has learned that at least one more billion-dollar, early stage fund is due to close in mid-September. But no other mammoth funds have shot across our radar.

So LPs have yet another reason to downshift after a hectic pace and are refraining from making new commitments.

John Backus, managing director of NAV.VC and a board member of the National Venture Capital Association, emphasizes the point that the big funds have already raised this year and what remains are the smaller VC funds and a few growth equity funds that will push the fundraising total higher.

And he was more confident than the average VC about LPs’ interest.

“LPs now like VC and want more,” he told VCJ.

Downloadable Data: Funds in registration as of Aug 22, 2016

Photo of coins being emptied from a money jar courtesy of Reuters/Darren Staples