The Challenges Facing Emerging Managers in 2024
2024 is proving to be a difficult year for emerging managers in the venture capital (VC) industry. The recent closure of Countdown Capital, an early-stage industrial tech investment firm, has highlighted the struggles that these firms face in an increasingly competitive market. Founder Jai Malik stated that the future of the industry favors larger firms, posing a significant challenge for emerging managers.
Emerging managers are concerned about their ability to attract limited partners (LPs) and raise funds. Many are offering more favorable terms to LPs and extending their fundraising timelines in order to secure investments. Even well-regarded, top-tier firms are hesitating to introduce premium carry, putting pressure on emerging managers to prove their worth. The year 2024 will serve as a deciding factor for many emerging managers, determining which ones will successfully establish themselves as tenured players in the VC space.
LPs and the Changing Landscape of VC Fundraising
The challenges facing emerging managers are amplified by the changing dynamics of LPs in the VC industry. In 2020, many LPs showed strong support for emerging managers, committing to funding their ventures. However, this enthusiasm has waned in recent years as LPs seek the perceived safety of larger, more established funds. The appetite for investing in new emerging managers has diminished, creating a significant hurdle for those trying to break into the industry.
LPs are now wielding substantial leverage in setting the terms of their investments. They are demanding perks such as information rights and co-investment opportunities without paying fees or carry. LPs now have more access to the inner workings of VC firms, making informed decisions and expecting greater transparency. This shifting power dynamic has made it more challenging for emerging managers to secure funding and meet the demands of LPs.
Is There Hope for Emerging Managers in 2024?
Despite the challenges and changing landscape, there is still hope for emerging managers in 2024. While fundraising for first-time VC funds in the US decreased compared to the previous year, debut funds still raised a significant amount of capital. This demonstrates that LPs are still interested in supporting new managers, albeit with more caution and scrutiny.
Furthermore, emerging managers have the opportunity to prove their worth by delivering strong performance and generating attractive returns for their investors. While data on fund returns is limited, emerging managers have the potential to outperform established managers in certain cases. This success could attract the attention and support of LPs, leading to increased funding opportunities in the future.
Strategies Used by GPs to Navigate the Fundraising Landscape
Emerging managers are employing various strategies to navigate the challenging fundraising landscape. Some are extending their fundraising timelines, granting LPs more time to commit capital. Others are resorting to secondary stake sales, selling their stakes in existing investments to raise additional funds. These tactics are aimed at attracting LPs and meeting their demands while ensuring the sustainability of the firm.
Additionally, some fund managers who would typically charge premium carry on their third or fourth fund have taken a step back. They have delayed implementing this fee structure, recognizing the need to navigate the current market dynamics more cautiously. These strategies demonstrate the adaptability and resilience of emerging managers as they work to secure funding and establish their place in the VC industry.
The Future of VC: Shutdowns, Extensions, and the Role of LPs
While the challenges facing emerging managers are significant, complete shutdowns of VC firms are relatively rare. Most firms find ways to quietly exit the industry without making bold announcements. However, the recent closure of OpenView, a well-established investor, highlights the potential for even well-established firms to face difficulties.
LPs invoking a contract’s key-person provision is one way that firms can experience a sudden shutdown. This provision allows LPs to withdraw their investments if certain key individuals within the firm, usually the founders or key decision-makers, depart. However, such dramatic events are still relatively uncommon in the VC industry.
Looking ahead, LPs will continue to play a crucial role in shaping the future of VC fundraising. Their demands and expectations will influence the terms and conditions set by VC managers. LPs have access to more information and are becoming increasingly selective in their investments. The ability of emerging managers to meet these demands and deliver strong performance will determine their success in the industry.
In conclusion, emerging managers face significant challenges in 2024 as they navigate a competitive and evolving fundraising landscape. The changing dynamics of LPs and market forces are making it harder for these managers to secure funding and establish themselves. However, there is still hope for emerging managers who can demonstrate their value and deliver strong returns. By employing strategic fundraising tactics and adapting to market conditions, emerging managers can overcome these challenges and forge a successful path in the VC industry.
Analyst comment
Negative news: The challenges facing emerging managers in 2024 are significant, with the closure of Countdown Capital highlighting the struggles they face in a competitive market. LPs are favoring larger firms, making it difficult for emerging managers to attract limited partners and raise funds. LPs’ changing dynamics and demands are creating obstacles for emerging managers to secure funding. Shutdowns of VC firms, like OpenView, also highlight the potential difficulties for even well-established firms. Emerging managers will need to prove their worth and deliver strong performance to overcome these challenges and establish themselves in the industry.
