The venture capital landscape has undergone a significant shift in recent times. The COVID-19 pandemic and subsequent economic downturn have led to a decline in startup valuations and an increase in investor caution. Amidst this uncertainty, two groups of investors are vying for dominance: legacy investors with years of experience and emerging managers who are looking at the market with fresh eyes.
Legacy Investors vs. Emerging Managers
Legacy investors have a significant advantage when it comes to navigating market downturns. With years of experience under their belts, they have developed a deep understanding of the industry and can anticipate potential challenges. They also have a sizable portfolio to worry about, which means they must be strategic in their investments.
On the other hand, emerging managers are entering the market with a clean slate. Without the baggage of prior funds or high-risk investments, they can focus on identifying new opportunities that may not be available to more established investors. This fresh perspective can be a significant advantage in today’s market.
First-Time Funds: A Record Number
According to PitchBook data, 2023 saw a record 270 first-time funds close. This means there are almost 300 emerging managers who raised their fund in a bull market and are now deploying it in very different market conditions. To better understand how this group of investors is navigating the downturn, we polled seven first-time funds.
Insights from Emerging Managers
Several first-time fund managers shared their insights on how they are preparing for the current venture downturn.
- Giuseppe Stuto, Co-Founder and Managing Partner at 186 Ventures: "We don’t carry any of the baggage that may come with having previous funds or having a lot of capital tied up in what seems to be highly overpriced vintages. Just like a founder, who looks at the world differently than subject matter experts, we (first-time managers) bring a fresh outlook on how certain problems and industries are developing."
- Leslie Feinzaig, Founder and CEO at Graham & Walker: "The big advantage is that we don’t have many prior investments that are now high risk, and we don’t need to focus as much of our time on triaging the portfolio. I can focus almost entirely on the path ahead."
Focus on Resilience and Runway
Emerging managers are better equipped to help their portfolio companies prepare for the current market conditions. They can focus more on making sure new companies they add to the portfolio are resilient against current trends.
- Giuseppe Stuto, Co-Founder and Managing Partner at 186 Ventures: "Part of our thesis now is that this bridge financing will likely not be as available, so depending on the industry and who the other financing partners are in the round, we have increased our ‘market readiness’ threshold."
- Ariana Thacker, Founder and Solo GP at Conscience VC: "I am definitely putting an emphasis on deals that result in the company having 24 to 36 months of runway."
Conclusion
The current venture downturn presents a unique opportunity for emerging managers. Without the burden of prior investments or high-risk portfolios, they can focus on identifying new opportunities and building resilient companies. As the market continues to evolve, it will be interesting to see how these first-time funds adapt and thrive in this challenging environment.
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