Mega-funds may dominate, but fundraising opportunities exist for smaller VCs

Smaller funds can capitalize on the early stage even as mega fundraising makes big VCs even larger, speakers at an NVCA and PitchBook webinar said.

Mega-funds once again dominated the US venture landscape in the first quarter. But a panel of venture experts noted last week that there are still plenty of opportunities for smaller emerging managers to raise capital from LPs.

During a webinar hosted by PitchBook and the NVCA on May 5, speakers from Silicon Valley Bank, Secfi and the NVCA said a lot of space had been carved out for smaller funds, which are typically investing at the early stage, because their larger counterparts aren’t typically able to deploy money to pre-seed and seed companies.

Shai Goldman, managing director, venture capital relationship management at Silicon Valley Bank, said most venture funds usually do not have the bandwidth to look at all available deals.

He noted the difficulty for the larger funds, which are fundraising at a record pace. “When you start deploying a $5 billion fund, it’s hard to do seed investing at scale,” Goldman said. “So I think that as these funds get substantially larger, it actually creates whitespace or an opportunity for a new fund to come in and participate in these kinds of pre-seed or seed rounds.”

He added that it’s challenging for some multi-stage funds to tackle the entire market and be involved in every stage, which is where smaller ventures can come in.

Mega-funds ruled in Q1, as the quarter saw record-breaking fundraises, according to the latest quarterly NVCA and PitchBook report, with US venture firms raising $32.7 billion across 141 funds during the three months.

Another trend that Goldman and other speakers on the panel noticed is where emerging managers are coming from. Though angel investors are still launching formalized fund structures and many established GPs are spinning off and forming their own vehicles, the panel noted that many new emerging managers are coming from the tech ranks. They’re operators with little to no investing experience who are flush with cash after their companies have gone public.

The panel said many are turning to rolling funds or syndicates to start their own funds. Goldman said this is becoming more widespread.

And these smaller funds are often based outside of the traditional hubs for start-ups, which is helping to fuel the rise of tech center growth in Miami, Austin and elsewhere.

“It’s opening up the opportunity for individuals if they’re not part of a family office or an institutional investor,” Goldman said. “It’s also allowing new managers to come in.”

Valuation bubble on the horizon

Goldman, as well as speakers from Secfi and the NVCA, each pointed out that as fundraising swells, the entire venture capital ecosystem also expands, including start-up valuations.

Viejay Piauwasdy, director of equity strategy at wealth management platform Secfi, said a valuation bubble seems to be brewing. “It’s going to be a trend and is going to continue as more and more people are shifting their money to the private sector and trying to get in on the action here. It’s going to be an interesting trend to watch the next few years.”