A data driven view of Emerging VC

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Recently, we surveyed a group of US emerging manager venture firms to assess a variety of metrics including performance, fundraising experiences, and portfolio construction strategies.

The full comprehensive presentation deck for the survey is linked here, and this post provides some of the summary findings. For current or aspiring venture managers, I’d also recommend checking out the 2018 benchmark put out by Different Funds, which largely focuses on venture fund term trends.

The raw data for our data was gathered from 110 funds from over 50 unique emerging manager firms (we primarily defined “emerging manager” as firms that were on a Fund III or below, and the majority of funds were sub-$100MM in size).

The Macro picture

- The 111 new first time US venture funds raised in 2018 (through 10/31) represented the largest number of 1st time venture funds raised in a year since the expansion of the venture landscape truly commenced in 2010.

- First time fund offerings represented 57% of all funds raised in 2018, versus only 40% in 2012.

- Of first time US VC funds raised in 2018, 51% closed funds that were $25MM or less.

Fundraising Trends:

- The difference in fundraise duration was nearly identical for sole GP funds (11 months) versus multiple GP funds (12 months). As expected, the latter group raised much larger funds, with a median raise amount of $41MM versus $25MM for single GP funds.

- Female led firms not only had the longest fundraising periods (16 months) but also raised the least amount of capital on average ($31MM). More eye-opening was that this group in our data set had the most prior venture investing experience — — in our study only 15% of female led firms in our data set had no prior institutional investing experience. While some skew may be present given the small sample size, we believe a larger study would yield similar results and would further offer clear signal that gender imbalance and inequity still greatly exists.

- On the other hand, GP teams that had gender diversity (where the gender mix was at least 33%/67% or better) actually raised the largest average funds ($41MM) and took the least amount of time to fundraise at only 10.6 months.

- First time managers with no previous venture experience actually raised their funds quicker on average (10.6 months) than their colleagues that had prior institutional experience (13 months). While counterintuitive, the data makes more sense when assessing the average raised by first time managers ($13MM/partner) versus those with prior institutional experience ($24MM/partner).

- Average institutional backing (i.e. Endowments, Fund of Funds, etc.) by percentage of total dollars was the following per Fund #:

  • 33% Fund I
  • 47% Fund II
  • 50% Fund III

- It was also clear that institutional LPs generally preferred backing managers with prior venture experience. On average, 29% of total dollars raise were from institutional LPs for funds raised by first time managers versus 42% for managers that had prior venture investing experience.

- Interestingly, the amount of institutional backing dropped precipitously for both groups post-2016, which we believe to be directly correlated to the slowdown in institutional backing to Fund I offerings.

- As we’ve discussed expansively in the past, before raising institutionally backed funds, first time managers commonly must raise proof of concept funds with capital coming from high net worth individuals and family offices. In looking at our data set, only 15% of Fund I managers were able to raise second funds that included at least 50% of capital from institutional LPs, implying the proof of concept path may likely require 2+ funds.

Performance and Portfolio metrics:

- Average portfolio size for funds in the study was ~30, with the largest portfolios being found in funds <$25MM (36 companies on average).

- Performance for Sole GP funds in our data set was quite robust, peaking at a Multiple on Invested Capital (MOIC) of 3.2X for vintage 2015 funds.

- In aggregate, performance was also best (1.98X MOIC) for portfolios that contained >30 portfolio companies — I can’t say this was surprising given that the majority of funds in the data set were seed funds, many of which have enjoyed a mark-up heavy environment.

- Special Purpose Vehicles (SPV’s) were most used by funds in the $25MM-$50MM range, with 54% of funds indicating they used SPVs for follow-ons, with the vast majority charging carry economics of 10% -20% to participating LPs.

- As illustrated in the presentation, performance data for vintage years 2014–2017 for fund size groups and fund number (I-III) were compared.

- We also looked at average ownership and check sizes by fund sizes and found the following:

Thanks to all that participated in the survey, and special thanks to Hana Yang and Gibson Cooper at First Republic bank for spending countless hours tabulating and analyzing the data.

VC/tech advisor, venture blogger, active angel investor, banker