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First-time VC funds face test

There is an oversupply of first-time VC funds with a 2022 vintage. As they struggle, managers that deployed their first funds during the recent boom will face scrutiny from their LPs…

Venture capital has traditionally been a more accessible route for emerging managers seeking to launch a new private equity fund.

Entrepreneurial specialists, particularly in early-stage VC, can often pitch investment opportunities not usually on the radar of LPs, with fund sizes typically much lower than most new buyout funds and a higher valuation multiplier effect over the long-term.

“Venture, by its nature, is venture. This is not an asset management business; you invest into explosive, new disruptive technologies,” says Alan Vaksman, managing partner and co- founder of venture capital fund Digital Horizon. “And the growth for many emerging managers is not linear. You have to have a sharp eye for innovation and good feel for teams and leaders capable of building disruptive businesses. Doing the same thing or just looking for the same stories will not get you very far.”

According to Cambridge Associates, new and developing VC firms are consistently among the top 10 performers in the asset class, accounting for 72% of the top returning firms between 2004–2016. But many of these smaller managers, investing early-stage with funds below $50 million in size, can often go unnoticed by institutional investors.

First-time VC fundraising rocketed last year as private equity allocations bounced back from the pandemic but, by number of funds closed, first-time VC funds were only around 25% of the European market and less than 20% of the US market, which tends to be dominated by funds of more than $1 billion in size, according to KPMG’s Venture Pulse in July.

Yet the number of new managers launching VC funds is booming.

According to data from Preqin, there are more than three times as many first-time venture funds with a 2022 vintage than buyout or other strategies. Early-stage VC was by far the most popular strategy, across several classifications. However, many of these funds would have been planned during the peak of the market cycle in 2020 and 2021 and have only come to market this year when the fundraising environment is much more challenging.

“Early-stage VC – which by definition requires smaller fund sizes – is probably where the opportunity for new LP commitments in VC sits. That’s much more likely to feature an emerging manager given the smaller fund size,” says Clay Deniger, CEO, Capstone Partners, a placement agent.

Most early-stage emerging manager funds are small in size, but the average size of first- time VC funds bounced back in 2021 compared to the pandemic year of 2020.

According to PitchBook, median and average VC fund sizes in North America were 40.7% and 61.7% higher in 2021 than they were in 2020, respectively. The European median and average VC fund sizes reached record highs in
2021, growing by 115% and 90%, respectively, year-on-year.

Two of the largest closes in the period were crypto-focused Paradigm One Fund in California, which closed at $2.5 billion, and Paris-based bio-tech focused Jeito I, which was the largest first-time European VC fund, raising $630 million.

Both provide some interesting clues on where the current generation of emerging VC managers are positioning themselves.

Run by Fred Ehrsam, who co-founded Coinbase, and a former Sequoia Capital partner, Paradigm’s record close proves there is still VC appetite from LPs for disruptive macro themes with years to play out.

“This new fund and its size are reflective of crypto being the most exciting frontier in technology,” wrote the Paradigm’s co-founders on announcing the fund’s debut last year. Private Equity Wire’s September Insight Report ‘Silicon Valley Blues: How VCs are adapting to a down market’ revealed that the majority of respondents to the report’s survey believe new technology such as crypto and blockchain-based platforms offer the most attractive investment opportunities across VC. “AI has been a hot sector for a while and there has been a lot of excitement about the potential of Web 3.0 and cryptocurrency,” said Nic Brisbourne, CEO and managing partner at Forward Partners in the same report.


Earlier this year, JP Morgan also highlighted recent record levels of VC investment into cryptocurrency and blockchain-based start- ups, despite the widely reported ‘crypto winter’. “While many of the ‘traditional’ sectors including software and pharma and biotech continued to represent the majority of VC investment activity in 2022, one of the most interesting trends we have observed in recent quarters has been the record pace of VC investment into startups in the crypto and blockchain industries,” wrote JP Morgan analyst Steven Alexopoulos.

Jeito’s success as an emerging VC manager is also a reflection of both the founder’s experience and the wide set of investment opportunities in its chosen strategy: European life sciences.

According to McKinsey, the past three years have seen a boom in VC funding for biotech companies, raising more than $34 billion globally in 2021 – over twice the total a year previous. The Covid-19 pandemic has placed a spotlight on new treatments and technologies and large tech-based VCs including Andreessen Horowitz and Madrona Venture Group are crossing over and (even larger) private equity firms such as Apollo, EQT and Blackstone have recently taken stakes or acquired well-known life sciences VC funds.

Jeito was founded by Rafaèle Tordjman after spending more than 15 years at European VC life sciences giant Sofinnova Partners and was able to draw on high-profile institutional investors including the European Investment Fund (EIF), US pension fund Teacher Retirement System of Texas (TRS), with its first- ever investment into a European biotech fund, and Singapore’s Temasek.

Looking ahead, the challenge emerging VC managers face as they move to their second or third fund may be less about strategy and more about performance.

“Many of the emerging managers we saw last year were able to raise $20 million or $30 million from their Stanford dorm room and they were deploying right into Q4 2020 [when valuations were high],” says Francesca Whalen at Integra Groupe. “Will they able to outperform existing managers? If you’re a first-time manager and the LPs lose faith, it will be very hard to raise a second fund.”

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