Window Shopping

I’ve got bad news for aspiring fund managers. Fundraising is only getting harder.

I spend a fair amount of time each week connecting with LPs. We may see each other at events and annual meetings, or just set up calls to check in on pipelines and prospects. I’m often trying to get the other LP to focus on some of our Partner Funds that are closing out a fundraise. I want our Partner Funds to have good, supportive LPs and to get back to the work of investing rather than fundraising. In that context, I’m always trying to figure out which, if any, of these LPs have an appetite for new relationships. We are only planning to add a few new names each year as we’ve built out much of the Partner Fund portfolio. I also see our friends at Cendana and Greenspring adding a few seed relationships as they are focused on seed and/or have raised dedicated fund of funds for seed managers. We would welcome more dedicated fund of funds or traditional LPs to join us.

The bad news is that I don’t know a traditional institutional LP that is still looking to build out its seed portfolio. We maintain a long list of LPs that we’ve seen show up in seed funds and have relationships with many of them. The consistent message in all my interactions of late has been a lack of interest or appetite for new relationships. I’m hoping that many of these LPs have just exhausted their annual commitment budgets but I’m afraid it’s something more than that.  

Many of the generalist FoFs and more active traditional LPs have filled their portfolios and will decide to re-up here and there but not add a lot of new exposure. There has been almost no liquidity, and other institutional LPs are dealing with larger funds coming back to market more quickly with little capital/bandwidth left for a seed portfolio. A lot of the individuals and family offices are tapped out after several funds and may have committed more than they intended to a very illiquid part of the asset class.

It’s not a pretty answer for new managers setting out to raise funds. Most LPs are still game to take meetings, especially when you can get another GP or LP to refer you into them. New managers should chase all those meetings and show up in person whenever possible.

However, it feels like many LPs are simply window shopping with no real appetite for making new commitments. We do see the occasional commitment that looks like a spontaneous purchase. We find it really hard to predict these purchases or to know where to point fund managers. We will sometimes see a new LP that hasn’t traditionally done seed VC show up and pull the trigger on a new fund. We’re seeing these from the smaller endowment and foundation crowd these days.

It seems even harder for funds under $50 million, as traditional LPs can’t even really look at these, and only a few FoFs will play in this range. These are getting filled out by family offices with perhaps less than two institutions playing along. Oddly, the smallest funds may be the hardest to raise. Funds less than $25 million are stuck in friends and family territory with individuals, a few family offices, and the GPs at hedge funds, large PE and VC firms as fundraising targets. I struggle with how to help these small funds and where to point them for capital.

Maybe we have enough seed funds already? It certainly feels that way in certain ecosystems. Maybe this is the system beginning to self-govern? We actively support more fund formation, and we’re excited about the explosion of new companies that seed managers are chasing. Part of the Startup Communities and Techstars message is that great companies can be formed anywhere and local capital needs to be grown over time. We can only hope that the market is somewhat rational, funding the right managers that are additive to the system.

I’ll close by wishing all the GPs speed and certainty in closing their funds, even if we can’t invest in all the good ones.  And if you’re an LP that wants to do more than window shop, call me to see what I’m looking at and where I’m investing.