Venture capital attracted a record amount of capital to the asset class in 2021, but now it’s experiencing a tougher exit environment. This is a result of inflation’s effects on profitability and access to capital for managers.
Venture capital attracted a record amount of capital to the asset class in 2021, but now it’s experiencing a tougher exit environment. This is a result of inflation’s effects on profitability and access to capital for managers. Below, we look at the top three challenges managers face in today’s fundraising market, and provide key solutions to overcome them.
Investors’ preference in the first half of 2022 was for larger funds. At 212, the number of funds closed was down by 56.4% in Q2 2022 compared with the same period last year (486). Plus, aggregate capital raised declined by 8.6%. Yet the quarterly average fund size is at a historical high of $252mn, up from $120mn.
There are many implications for smaller managers. Average timing for funds on the road will be longer, and the environment will become more challenging – particularly for first-time funds. Experienced venture fund managers raised 67% of aggregate capital between Q1 and Q3 2021, the highest percentage ever, leaving less capital available for emerging managers to fundraise.
Venture capital is gearing up for a cold spell as portfolio companies' growth and fundraising are slowing. Concerns over start-ups’ high burn rate and limited exit options caused by a global equity sell-off have extended funds’ holding periods and slowed capital distribution. This has the knock-on effect of weakening fundraising, and we should expect a more pronounced slowdown in H2 2022.
A hallmark of the boom in venture capital activity in 2021 was the increased participation of non-venture capital firms, driving up competition. This included hedge funds and hybrid public-private investment fund involvement in venture funding rounds. Among non-venture capital fund managers that invested in venture deals in the first three quarters of 2021, crossover funds were the most active. Their involvement has risen rapidly, investing in 577 funding rounds in 2020 – up 40% on 2019. They went on to invest in 854 venture deals in the first three quarters of 2021 alone, up another 48% year on year. The aggregate value of the venture investments that crossover funds participated in rose even more dramatically – from $53bn in 2020 to $126bn in the first three quarters of 2021 – a 136% increase.
For most fund managers, capital concentration is the biggest challenge. To overcome this, you need to focus your time and resources on reaching out to investors that are actively allocating capital to funds like yours. Building your target list based on the type of investors that are the most active in the asset class can be a good way to narrow down your target. This can help reduce time spent on the road raising capital – and the quicker you achieve your fundraising target, the quicker you can invest that capital in companies and assets.
Preqin tracks over 7,400 LPs active in venture capital globally on Preqin Pro. See how our detailed profiles from large public institutions to individual family offices, and everything in between, could help you achieve your fundraising targets by requesting a demo today.
To further narrow down your target list when fundraising, you can also prioritize LPs with mandates to invest in venture capital funds like yours.
As of July 2022, Preqin tracks over 360 LP mandates and RFPs for the venture capital asset class on Preqin Pro, with detailed plans on how they will allocate to the asset class over the next 12 months. See how this data could help you boost your fundraising activity by requesting a demo today.
Finally, focusing your efforts on approaching LPs that are currently below their target allocations for the asset class can increase your chances of success when fundraising. Separating LPs that are over-allocated to your asset class from the ones that are under-allocating against their targets will help you pinpoint the right investors to approach.
Preqin Pro gives you access to the industry’s most comprehensive private capital and hedge fund datasets and tools. Find investors searching for investment opportunities like yours. Be the first to know about new investor searches and mandates. Build your pitch with detailed information on investors' past activity and future plans, and drive a successful outreach with details on key personnel and their preferred method of contact.
Preqin also publishes institutional research via Preqin Insights+, providing analysis of investor sentiment through regular investor surveys and exploring the fundraising environment across various markets.