It’s been a challenging year for many in the venture community. But emerging managers, in some respects, are facing the steepest of hills in 2020.
Trying to establish relationships with LPs is hard enough. But doing so amid a pandemic presents unique challenges for emerging manager VCs, who have had to pitch prospective backers over Zoom and wait out delays as some of their potential LPs pause on pulling the trigger for new commitments.
That’s not to say it’s impossible, but it does mean it may take longer for LPs to conduct due diligence on a new fund.
That’s where an organization such as Oper8r comes into play. Founded last year, the San Francisco-based company bills itself as a Y Combinator for emerging managing venture capitalists to raise institutional backing.
Oper8r aims to teach emerging fund managers how to raise institutional commitments and all the ins and outs that come with fund management.
Much like Y Combinator, which provides instruction to seed-stage start-ups to work with investors, Oper8r held a cohort class in the summer with 18 emerging funds. Eleven of the funds in its first cohort were led by underrepresented VCs, such as women or people of color.
Oper8r is currently assembling its second cohort, which it hopes to kick off early next year. Although it may one day launch an investment platform on top of its service, Oper8r does not take a stake in the funds in its cohort.
The organization was created by longtime friends Winter Mead and Welly Sculley, who knew each other in high school and were classmates at Harvard University. Mead was formerly a principal with Sapphire Ventures and before that was with Hall Capital Partners while Sculley is a former operator who most recently worked as business development director with Ripple.
Over the last two months, the pair talked to Venture Capital Journal via Zoom calls and in email exchanges about the challenges that today’s emerging managers face.
What kind of funds do you work with?
Sculley: General partners on their first or second funds. Maybe they had a proof of concept fund or an SPV, but are now institutionalizing. Generally, they’re managing under $100 million, or some have less than $50 million.
What do you provide the emerging managers?
Mead: We help the emerging managers understand what it means to institutionalize.
It’s a hard process to build a firm. It’s hard to scale. We help guide emerging manager VCs through the process, rather than them learning through trial and error.
Sculley: In our cohort program, we introduce the VCs to outside experts, such as service providers and LPs with a history of investing in emerging managers. We also bring in other VCs who are on their fourth or fifth funds and talk about their experiences. We facilitate the dialogues.
A lot of emerging manager VCs have investing experience, as some of them have spun out of existing firms or have angel invested on their own. But when start your own firm, you don’t necessarily have experience in the back office, like investor relations and operations. Many are focused on investing and not on raising capital and communicating with LPs.
Mead: Another key point of what we do is help the emerging managers understand the LPs and where they are coming from. There’s an element of empathy to what we provide. Why are LPs asking about this or that in a certain way? What is their goal? What are they trying to find in their due diligence? Unless you’ve done this before, it’s hard to get that base of knowledge on how to build a firm.
What do you do for the LPs?
Sculley: We see a lot of friction taking place with LPs. Maybe they’re new to VC or perhaps they’re refreshing their capital commitments to VC. Could be family offices, endowments or other types of LPs. They all want to invest in the best VCs. There are some established funds they can’t get into. Many LPs are looking for allocation into the next generation of great funds.
Anecdotally, the universe of emerging managers seems huge. Why do we see so many?
Mead: Some of that is based on the success of the prior emerging managers, the early microfund VCs, such as First Round, Baseline and Harrison Metal. Success begets success.
These funds were built on the same trend we’ve seen with start-ups. Because it became cheaper to start a company, the fund size could also be smaller and still generate great returns. This trend has continued and only accelerated, as more investors begin developing track records as independent angels or investing on top of angel platforms.
This goes back to what we do. We help GPs go from raising from friends and family to raising from the next level of LPs. And we help the LPs identify the quality managers.
How has the pandemic affected emerging managers this year?
Sculley: Based on our conversations with emerging VCs, the pandemic did cause a slowdown in the market. But it was only for a couple of months, not indefinitely as some feared. Taking a step back, it seems clear that there are many more tailwinds behind capital formation in VC. We wrote about this a couple of months ago. So I am curious to see what the actual numbers look like in six to 12 months.
Mead: Fund formation has not slowed down, but for LPs it’s harder to identify where they should be spending their time. Covid has created a nearly 100 percent virtual environment. Relationships still matter, but it’s harder virtually. So people are thinking creatively on how to meet, getting to know each other and building those relationships. Due diligence is just taking longer.
What’s your outlook for 2021?
Sculley: The market is continuing to grow. There are more channels to become a VC, and there are platforms available to build a track record. Plus, new technologies exist to help emerging manager VCs set up the nuts and bolts of their funds.