Private Market Insights

🙌 Advice For Raising Fund II and Challenges Fund Managers May Face

Per Hustle Fund:  Raising a second venture capital fund (Fund II) requires a strategic approach and managing several challenges. LPs typically demand a proven track record from Fund I, creating razor thin margins of error. Emerging managers without established track records face significant skepticism, regulatory delays, and fierce competition for limited capital allocations, especially during market contractions. As a hedge against these difficulties, fund managers should focus on building relationships with high net worth individuals and family offices, as well as institutional sources of capital. Additionally, the fundraising process can take 18-24 months due to intense due diligence on existing portfolios, and economic downturns may further lengthen timelines as LPs become more risk-averse. Therefore, successfully raising a Fund II necessitates early preparation, strong portfolio performance, and the ability to articulate a compelling investment thesis to potential investors.

💦 Deliciously Juicy Takeaways

🕰️ Past

• In 2021 and the first half of 2022, the venture capital industry saw record-high fundraising levels driven by an abundance of capital. US venture firms raised over $162 billion in 2022, surpassing 2021's total. 

• However, fundraising slowed significantly in the second half of 2022 as market uncertainty increased and limited partners became more cautious about making new commitments.

🔎 Present

• 2023 was a dismal fundraising environment with only $66.9 billion raised across 474 funds, the industry’s lowest since 2017. This is compared to $172.8 billion in 2022.

• Lack of exits and high valuations make it hard to demonstrate returns needed for Fund II. The number of down rounds doubled in 2023 compared to 2022, with many startups shutting down or filing for bankruptcy.

• Firms without strong Fund I performance are struggling to raise in this environment. Only 134 new VC funds were established in Q2 2023, and only 99 in Q1, the lowest number of new funds since 2013.

🔮 Future

After all this doom and gloom from past and present trends, we would recommend a few pieces of advice that can be helpful if you are raising funds.

• Target high-net-worth individuals and family offices, who are more flexible on returns and invest based on the VC's vision/thesis shows promise. For example, over 50% of VC funds raised in 2022 came from this investor group.

• Utilize multiple closes for Fund II, allowing smaller initial raises and follow-on closes as progress is demonstrated. Up to 80% of funds employ this strategy for their second fund.

• Focus on hot sectors like AI/generative AI that attracted significant VC investment in 2023. AI startups raised over $38 billion in 2023, a 40% increase from 2022.

LP News & Insights

• Pitchbook: Generative AI seed funding drops 76% as investors take wait-and-see approach

• Asian Investor: Why some Asian family offices prefer working with VC, PE managers

• WealthBriefing: Single Family Offices Didn’t Slash VC Allocation In 2023

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