How diverse managers can raise their first fund

There’s no denying that in recent years, the venture community has seen more diversity in
emerging fund managers.

Anecdotally, just this week, Los Angeles-based Slauson & Co, led by managing partners Austin Clements and Ajay Relañ, raised more than $70 million for their debut fund, according to a regulatory filing. The early-stage firm focuses on what it calls sustainable economic inclusion by investing in entrepreneurs often overlooked by traditional venture investors.

Slauson, named after a major thoroughfare in LA, and many others are enjoying the current spotlight LPs are shining on diversity and underrepresented fund managers. And more programs are cropping up to accelerate diversity and representation in emerging managers.

That was one of the takeaways from a report issued this month on how diverse fund managers can raise their first fund. Level Ventures produced the report in collaboration with the LGBTQ+ group StartOut and Silicon Valley Bank.

The report was based on a virtual roundtable event held earlier the summer that was moderated by Ian Foley of Level Ventures. The panel consisted of venture capitalists McKeever “Mac” Conwell II of RareBreed Ventures and Charles Hudson of Precursor Ventures; limited partner Kelli Fontaine from Cendana Capital; and Daniel Dehrey, who focuses on emerging managers for Silicon Valley Bank.

Foley noted that LPs are interested in diverse fund managers for bringing in new dealflow and considering investment opportunities from a different perspective.

But despite the fact that venture is flush with capital and that many in the industry have acknowledged diversity and representation issues, the report stated that there is still a large gap. Most firms remain underrepresented.

The report stated that the market is still catching up with decades of “very coded career paths to VC,” which consists of founder to professional investor to fund manager.

“Historically, it has been the only path available, unless you have easy access to HNWI,” the report said. “It is still very difficult and unusual to make it any other way than the traditional approach, especially for first-time fund managers.”

The panelists noted that starting a fund from scratch requires a lot of effort and most aspiring fund managers underestimate how much it takes to raise a first fund.

“People get to the one-year mark and are burned out emotionally and financially,” said Hudson, founder of Precursor, which has raised about $30 million for Fund III, according to a reg filing last year.

Based on polling of the audience during the virtual panel, the expected target of fund one is in the range of $5 million to $20 million. The panelists noted that first-time fund managers generally target larger fund sizes than they actually raise for their debut efforts since the task of raising a fund is difficult and takes longer than expected.

In talking about the panel and the struggles of diverse fund managers, Fontaine of Cendana told Venture Capital Journal that it’s important for emerging diverse fund managers to establish networks to get into deals. And that will build a track record of investing, as an angel investor, prior to raising their first funds.

“That’s really hard for underrepresented minorities and women, who may not have the personal capital to make investments right now,” she said. “But if you have some access to capital or if you can start and angle track record on AngelList, that will give us LPs something to diligence when you raise a fund.”