In February 2021, Vaibhav Nalwaya, co-founder and managing partner at Wavecrest Growth Partners, was getting ready to begin fundraising for the firm’s second fund.
This was not Wavecrest’s first rodeo. The growth equity investor’s inaugural fund had closed in early 2019 on $190 million from various pensions, endowments, foundations, funds of funds, insurance companies and family offices.
However, this time around would prove to be much different from when the venture firm talked to investors for Fund I. Just as many other venture funds have had to do since March 2020, Wavecrest pivoted to a virtual fundraising model.
“It was 100 percent over Zoom, which is highly unusual in fundraising,” Nalwaya says. “It was a very interesting experience; it was very efficient but also extremely intense.”
In the end, Wavecrest raised $290 million in July, all of which was done virtually. Over the past 18 months, Wavecrest and others in the venture community have adjusted to a different way of life. The pandemic shut down travel and made it unsafe to meet contacts in person. Thus, VCs, LPs and entrepreneurs turned to virtual meetings, much like the rest of the world.
The result has been a surge in fundraising, particularly among the mega-funds.
This year’s VCJ 50 shows that the top 50 venture fundraisers worldwide raised a collective $211.9 billion over the previous five years (through the end of June 2021). That was nearly 29 percent more than the $164.3 billion raised by the top 50 firms by June 2020.
It is not just that the top 50 largest firms are raising larger funds, which they are. They are also coming back quicker to the LP table, asking for re-ups sooner than they previously did.
Clearly, the lack of in-person meetings was not the signal of an end to oversized fundraising that many had predicted it would be at the start of the pandemic.
Despite the strange circumstances of raising money virtually, fundraising in 2020 and 2021 has broken records.
Venture, after all, prides itself as an industry that is built mainly on trust and personal contacts, and the intimacy of relationships in the venture world has always been one of its hallmarks. Pre-pandemic, many VCs would never invest in anyone they had never met in person. The same was true of LPs. But the pandemic has changed so many aspects of the world and accelerated trends in many industries, and venture was never going to go untouched.
Data from PitchBook and the National Venture Capital Association shows that 2021 is on track to be the best year for venture. The first three quarters of the year saw $238.7 billion in US VC deal activity, which already surpasses 2020’s full-year record of $166.4 billion in US deals. Much of the growth has come from mega-deals – investments in companies at or exceeding $100 million. About 198 of these big-ticket investments closed just in the second quarter of 2021.
Fundraising has also been robust, as evidenced by the VCJ 50. Take, for example, Accel. The venture firm raised more than $3 billion across three new investment funds in 2021 alone. The funds – a $650 million European and Israeli early-stage vehicle, a $650 million US early-stage fund and a $1.8 billion growth vehicle – helped lift Accel in the ranking by two positions. The firm has raised nearly $10.8 billion in the last five years.
Similarly, Andreessen Horowitz raised $11.5 billion in five years and also rose in the ranking by two positions, led in part by its $3.2 billion growth fund and a $1.3 billion flagship fund that each closed in 2020. The total figures do not include AH’s $400 million seed fund, which closed after the June 30 cut-off for the VCJ 50.
And it can only grow from here. The world emerged from 2020 with more optimism. Vaccines became readily available, and governments have allowed indoor gatherings again if certain requirements are met. But even with a more relaxed environment, most VCs and LPs believe a hybrid model of fundraising will persist, dictating what fundraising will look like in the future.
Although many cities in the US have resumed a lot of pre-pandemic activities, restrictions continue to exist. And some people are preferring to limit their travel due to a surge of cases in the summer.
Nate Leung, a principal at the LP Sapphire Partners, says the firm itself and the early-stage venture firms it invests in have had to get used to talking to a camera rather than in real life to a person. But it still poses an issue for the firm; it prefers to invest in people it has had prior interaction with.
“It helps to have a prior relationship in person,” Leung says. “But that said, over the past year we have made commitments without having had that. It’s possible to get comfortable without meeting face to face, and we can definitely run investment processes and due diligence without doing so.”
He adds that the firm’s preference is for a hybrid type of engagement to establish closer relationships with GPs.
The switch had to take some getting used to since it changed how some meetings were conducted. Things that normally were discussed in more informal conversations over coffee became full-on presentations.
Leung says many of the meetings with GPs have been more structured and took on what he called a “many to one” nature. This made pitches less informal and more prepared: GPs would sometimes pre-record videos or share videos in advance and have a live Q&A with LPs as a way to limit the time people had to be in a virtual meeting space.
“The communication and the relationship-building has scaled up a little bit,” Leung says. “GPs are putting in a little more structure in how they’re communicating with LPs because we don’t have these more ad hoc visits, so there are more webinar-style meetings.”
Zooming into a fundraising ease
Fundraising in 2020 and 2021 has offered venture firms and LPs the chance to cut costs, especially expenses involving cross-country and round-the-world travel for meetings and due diligence.
Other VCs have noted that not having to spend time traveling naturally expanded their reach. For example, True Global Ventures tells Venture Capital Journal that it spoke with investors in multiple time zones for its fourth fund, the first that it opened to outside LPs.
This has been true for many firms. As a result, they got more people involved in many of their meetings and expanded their reach to investors in other countries.
Wavecrest’s approach of holding most meetings virtually, with an added in-person meetup to close a deal, is already more commonplace. Marrying the tried and true in-person meeting, though, might be more complicated, what with the attendant issues found in virtual meetings.
Nalwaya says doing everything on Zoom has its pros and cons. Wavecrest had more investor meetings and cut travel costs to zero. But this also meant there was a larger volume of people to talk with and pitch to. Though LPs seemed to have adjusted well to virtual fundraising, Nalwaya points out that some investors from Europe declined meetings because they had no prior relationship with the firm.
The fact that connecting GPs and LPs is as easy as sending a Zoom link invite can sometimes be overwhelming. Chris Winn, chief executive and co-founder of Ormonde, says the challenge for the family office adviser was not to spread itself too thinly and to make sure it was speaking to firms on which it had already conducted due diligence. Just because a firm can talk to more GPs does not mean that it should. “[Zoom] almost made it too easy,” he says.
Winn says Ormonde emphasized pre-existing relationships, and communicated over Zoom and Microsoft Teams with managers it had built rapports with. Winn notes that the firm still works with emerging managers.
Zoom meetings became the latest way for the venture world to show its strength in many ways. Much of the enthusiasm around VCs and start-ups relies on several market factors: the fact that more companies stay private longer because it is easier to raise capital; the acceleration of technology adoption; and sky-high valuations for many start-ups. These favorable factors convinced many LPs to come back and reallocate funding again for VCs, even if it meant meeting over Zoom.
New LPs, particularly family offices, have increased competition in fundraising. Family offices, which previously had little exposure to venture, began moving to the asset class, enticed by its strong performance. In addition, virtual meetings allowed venture firms to tap new LPs and introduce their investment theses to them, even if they had not been able to meet in person prior to the pandemic.
Winn says it can be easy for family offices that want to increase exposure in venture to be excited by the possibility of high returns – which, for him, means LPs need to exercise discipline and invest in just the right levels.
Yet although Zoom meetings can expand the network of GPs and LPs, this does not mean it was easier to get money.
Brian Smiga, co-founder and managing partner at Alpha Partners, says that while the firm took more meetings, that did not necessarily translate into more funding, especially to managers with which LPs had no prior relationships.
“For GPs with an existing LP and an established track record, they should be doubling the amount of capital they’re getting from their LPs while they can’t leave their offices,” he says. “They have an advantage because LPs are not going to on-site visits. They’re taking a lot of meetings, but they can’t quite get to the final decision very often because of constraints.”
He adds that there are fewer new managers getting allocations because many LPs are already tapped out from re-ups. Many funding decisions get delayed too, as some LPs wait if there is any leftover cash at the end of a funding cycle before choosing to work with a new manager.
PitchBook says first financings numbered 1,743 and were valued at $9 billion as of June 2021. Emerging managers saw some decrease in funding in 2020, though cash raised was a tick higher.
Discussions on hold
Ormonde’s Winn admits that his firm paused all discussions with new managers early in the pandemic. “It was all about understanding what is on the balance sheet now and making sure that we at least know of gaps or potential problem areas in our portfolios to make sure that we stay ahead,” he says.
Ormonde restarted talks with new managers at the beginning of 2021.
Investors should also take note that crises create a lot of opportunism. Winn says that although it has not materialized during the pandemic, sometimes mispricing and economic dislocation happen. For him, 2021 and the following years might be “difficult vintage years for certain types of strategies.”
Smiga says some LPs’ hesitation to fully commit to emerging managers solely via virtual meetings may be because investors tacitly want to support funds they have worked with before, and which are themselves also raising more money.
Although there are LPs that specifically focus on new and emerging managers, the lion’s share of capital usually goes to mega-funds. These funds constitute the majority of the VCJ 50 and have already, of course, formed strong and trusted relationships with LPs that transcend a computer screen.
Fundraising, even during the pandemic, also benefited from more favorable market conditions. Valuations are growing and more companies are choosing to remain private. That the pandemic did not halt this growth and only magnified it is a testament to how strong the venture market is right now.
As Leung of Sapphire notes, going virtual has only accelerated information gathering for many investors: “With quicker fundraising, deployment cycles and markup valuations, the amount of progress observed with a manager over the course of a year can now be the equivalent of two or three years previously.”
What fundraising might look like in a year or so is anyone’s guess. Next year’s VCJ 50 will no doubt be as enormous as this year’s, if not larger.
But many believe that people in the venture world will continue to find new ways to break records, even if it is from the comfort of their own homes.