Follow me @samirkaji for my random, sometimes relevant thoughts on the world of venture and start-ups. Over the past several years, we’ve spent considerable time studying and writing about the rapidly evolving emerging manager venture landscape. As illustrated by the chart below (data courtesy of Pitchbook , combined with our own data tracking), the propagation of new firms has intensified in the last two years and since the beginning of 2017, more than 50% of total funds raised have been fund 1 offerings. With the barriers of entry being low for the smallest venture funds, many new entrants are managers that bring minimal prior professional investing experience. As such, a significant portion of new offerings are in the sub-$25MM range and are primarily backed by high net worth individuals and smaller single family offices. When examining this segment more closely, over 50% of first time funds (post 2016) in the sub-$25MM segment raised funds that were under $15MM at final close (funds in this size range are often referred to as proof of concept or nano-funds). With the economic and operational challenges these size funds inherently present to GPs (notably fee stream and reserve capital), the business plan for managers starting these funds is fairly typical — execute a given thesis effectively and transition from a proof of concept fund to larger subsequent funds that are backed primarily by institutional LPs. This path to institutionalization was one that many first and second generation (pre-2014) Micro VCs successfully navigated. In this past, this leap was perhaps a bit easier to make given fewer managers in market, active emerging manager mandates by LPs, and greater emphasis placed on portfolio mark-ups. Attracting institutional LP capital is almost always a necessary component for scale and durability (please note in the context of this post that I’m referring to institutional capital as allocations that are at least 5–10% of a fund, and not pilot checks that some institutional LPs deploy for relationship building or optionality). Before we get into the current market and the considerations going forward to become institutional, we believe there are three broad emerging manager segments: Late seed/Series A ($75MM+) – Post-seed/Series A round lead investor – 2–3 partners – LP base that is largely institutional (70%+) – Scaling in fund size often planned for subsequent funds Institutional Seed ($25MM-$75MM) – Lead rounds across seed spectrum (pre-seed — post-seed) – 1–3 partners – LP base mix of institutional investors and non-institutional (With the former being a larger component for funds at the top end of this range) Co-invest seed ($0–25MM) – Typically act as co-investor (versus lead) in majority of deals – “Proof of concept” funds (particular with funds <$15MM) – LP base primarily High Net Worth...
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