Deciphering the VC fundraising landscape

This article originally appeared in Forbes.

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Venture capital fundraising statistics make for sober reading. According to Pitchbook, VC fundraising in the first quarter of this year dropped 44.2% compared to Q1 2023—and the 2023 figure was half that of 2022. The last time first quarter fundraising was this slow? 2015.

Granted, there are some exceptions. Firms like General Catalyst and A16Z continue to close multi-billion dollar funds, but that’s not the experience of most fund managers.

This article will examine what has contributed to the current fundraising crunch and discuss how smaller firms might still find success.

Resetting to a previous "normal"

It’s worth noting that the past decade has seen massive transformations in venture capital. In 2015, there were 1,519 VC firms in existence. Funds were small, and many Limited Partners (LP) struggled to enter VC as an asset class.

That changed during the tech boom that began with COVID-19. The average fund reached $167 million in 2022, up 39% from 2019. Interest rates were absurdly low and private capital was seen as an attractive asset class, which led LP dollars to flow in. This coincided with the creation of new funds: by 2023, their number had swelled to 3,417.

Today, smaller funds are once again becoming the new normal. The most recent data on Q1 2024 shows the average fund was $115 million, almost the same as the 2019 figure. But this isn’t because VCs want to raise smaller funds. We now see the impact of a much more hyper-competitive, difficult fundraising market—and a return to pre-2022 norms.

The flight to quality

The difficulty of fundraising is not ideal—or particularly fun—for fund managers. But for the tech industry as a whole, it may signal a return to quality. The hype cycles and zero-interest-rate environments of the past few years made it considerably easier for fund managers to raise, regardless of their track record or experience.

With the benefit of hindsight, it’s clear that some startups were massively overfunded. We’ve already seen significant crashes in tech and more are likely to come. Valuations have dropped across the board. Exits are few and far between. The result: many LPs have their money tied up in existing portfolios, and many VCs lack the track record to persuade investors to re-up on their next fund.

For LPs who can still invest, there is a flight to established brand-name firms. VCs with great past performance are fundraising successfully while lower-performing and newer VCs are struggling and may not be able to raise another fund. This could result in smarter investments, on average, across the VC tech industry.

How to fundraise in today’s market

While decidedly unhelpful to new and emerging fund managers, the best advice for fundraising right now: be a large firm with a clean track record. For those not able to manage that feat, consider these strategies:

Plant "relationship seeds" early

Successful fundraising is extremely relationship-based and you’re very unlikely to go from a net new relationship to a close in a short period. It’s a long-term investment. Start a relationship based on a mutual connection wherever possible and nurture it over time. For some funds, this means building an extensive network of advisors—expert leaders who can vouch for your fund’s brand and influence potential LPs.

Seek investors in uncommon places

Some firms are looking overseas to meet their fundraising shortfall. While existing relationships in a new country might not be abundant, you may not need to start from scratch. Relationship intelligence technology allows you to uncover hidden connections across your firm, both from communications histories and inferred through previous work experiences.

Anticipate LP scrutiny

It’s essential to plan for how difficult fundraising will be. LPs have become more savvy about VC as an asset class. They know what questions to ask and what to be skeptical about. Valuation policies are a good example. A valuation may look good on paper, but it might also be based on the last, clearly overvalued round led by a growth investor. Increasingly, LPs are drilling down and doing their due diligence to form their own opinions.

Please ensure your thesis is credible and that you can explain why an LP should invest in your fund rather than with another established firm. You may also consider less conventional sources of capital—places where others may not be looking.

Gain insight from tech built tor VC

While VCs must continuously invest time in planting the seeds and nurturing relationships (even if they don’t pay off for an immediate fundraiser), it’s also true that the right technology can make this process much easier.

Datasets like Pitchbook and Preqin mean you can track potential LPs around the world, and find out when/who has invested in other funds. This can inform your strategy and outreach, all of which should be tracked in a CRM to streamline relationship management and provide teamwide visibility.

A tale of two cities

Firms fundraising today are having fundamentally different experiences. And until a rise in exits brings more optimism (and capital) to the industry, many fund managers will continue to struggle. But it’s not an impossible scenario. By combining the right technology with a strong thesis, talk track and LP sourcing strategy, VCs can navigate and hopefully succeed in a challenging fundraising landscape.

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