Traditional VCs look to emerging managers for deal flow and in some cases new partners – TechCrunch
Nasir Qadree, a Washington-based investor who just raised $ 62.1 million for his first venture capital fund, recently told us that as his fundraising gained momentum, he had been approached by established companies looking to absorb new talent.
He’s chosen to go it alone, but he’s not the only one generating interest. For the record, bringing emerging managers into the fold is one of the new ways powerful venture capitalists remain powerful. Early last year, for example, crypto investor Arianna Simpson – who founded and managed her own crypto-focused hedge fund – was drawn to heavyweight firm Andreessen Horowitz as a business partner.
Andy Chen, a former CIA weapons analyst who spent more than seven years with Kleiner Perkins, was raising his own fund in 2018 when another high-profile hedge fund Coatue came in to strike. at the door. Today he helps lead the early stage investment practice of the company.
It is easy to understand the appeal of such companies, which manage huge funds and wield tremendous power over the founders. Yet as older companies seek to recruit from a growing pool of new managers, they may have to wait for the most talented in the group; in some cases, given today’s go-go market, they might not stand a chance.
There is, of course, a long list of reasons why so many people decide to raise money these days, from the glut of capital looking to find its way into startups, to tools like Angelist’s. Working capital and revised crowdfunding regulations in the United States
Emerging managers also seem adept at capitalizing on the blind spots of the venture capital industry. One is the excessive wealth of more veteran VCs. The experience of an investor counts for a lot, but there is a lot to be said for young people who are still asserting themselves, who do not sit on more than a dozen boards of directors, and whose future will be narrow. linked to that of their founders. .
Yet there are other trends that the establishment has long ignored. Many companies probably regret not having taken up crypto more seriously earlier. Many teams have also ignored for too long the skyrocketing economic power of women, which new managers are bringing back to their own investors.
Not the last, many have stubbornly resisted the racial diversification of their ranks, creating an opening for investors of color who are keenly aware of changing demographics. According to census projections, White Americans will represent a minority of the American population within 20 years, which means that today’s racial minorities are becoming the primary engine of growth in the country.
That new managers have rocked the industry is probably a good thing. What some are starting to wonder is whether they can afford to maintain their independence, and that answer is not yet clear.
Like the startups they fund, many of these new managers are now operating in the shadow of the companies that came before them. It’s a seemingly copacetic arrangement. Venture is an industry where collaboration between competing companies is inevitable after all, and it’s easy to stay on the safe side of giant companies when you invest a non-threatening amount in fledgling companies that you later pitch to the bigger players.
Ensuring that things stay smooth – and that the flow of transactions keeps coming – a growing number of venture capitalists are now playing the role of sponsors, committing capital for new managers. Foundry Group was among the first to do so on an institutionalized basis five years ago, setting aside 25% of a new fund to invest in smaller venture capital funds. But it happens regularly across the industry. Jake Paul’s new influencer-focused fund? Supported by Marc Andreessen and Chris Dixon of Andreessen Horowitz. Katie Stanton’s Moxxie Firms? Supported by Bain Capital Ventures.
The common joke is that big companies have raised so much money that they don’t know where to plug it all in, but they also protect what they have built. That was the apparent thought in 2015, when a then-besieged Kleiner Perkins attempted to initiate merger talks with Social Capital, a fashionable venture capital firm founded by Chamath Palihapitiya.
That agreement reportedly fell apart over who would ultimately run the show. Kleiner then underwent an almost complete change of leadership to regain a foothold, while many members of Social Capital left to start Tribe Capital. But venture capitalists certainly follow managers who think could add value to their brand.
Some will certainly take the step if asked, given the brilliance and economy of a great brand, and because teaming up can be so much easier than fighting alone. Early-stage investor Semil Shah – who built his own company while working as business partner with different and established outfits – thinks it is “natural to assume that a lot of new working capital” in particular “will run out, stay small, or try to scale and realize how difficult it is and maybe they will go to a bigger company once they have established a track record.
This latter scenario, however, is not as exciting to some as it might have been earlier in time. Eric Bahn, who co-founded Bay Area-based startup company Hustle Fund in 2017, predicted last week on Twitter that “establishment venture capital funds will acquire emerging venture capital funds, which build differentiated networks / brands”. While this could be seen as a soft landing, Bahn added, “I don’t know how I feel about this. 🤔” (Many people weighed in to say they also felt conflicted.)
Bahn also later tweeted that “to be unequivocal, Hustle Fund is not for sale”.
When asked about its resistance to a possible merger, Bahn said he was “worried about the consolidation of the industry” given that there have been “systemic problems related to the exclusion of VCs in the past with regard to women and other under-represented groups ”.
He adds that even more recently he has “met some LPs who – wink wink – really like men who come from Stanford and have computer science degrees.” Both cause him to worry that even a team with “good intentions can come back to average.”
His words echo those of Qadree, who told us last week: “I think it’s up to someone like me and the people who are constantly asked these questions to have a strong belief in how to think about building your franchise. I went through so much to get to this that giving up my equity, branding and ideas ”was not an option he was willing to consider.
Meanwhile, investor Lolita Taub from The Community Fund – a $ 5 million seed fund focused on community-themed startups and backed by Boston-based venture capital firm Flybridge – is more optimistic about the ability of emerging managers to remain independent. Rather than gobbling up smaller funds, she predicts that more established players will begin funding – and sustaining – emerging funds that have overlapping areas of interest.
Taub suggests it’s the next step beyond VCs who have worked with so-called scouts to find undiscovered gems. “I think older players are looking to extend their reach beyond what they know.”
Despite this, the industry is changing shape and some form of consolidation, if not imminent, seems inevitable once controls inevitably stop flying.
Some companies will explode, while others are joining forces. Some new investors will end up in the best companies, while others will go out of business.
Almost the only certainty right now is that a larger fund “buys” a smaller fund is “not that complicated,” according to fund administration expert Bob Raynard of Standish Management in San Francisco.
Asked about the mechanisms of these links, he shares that it “generally involves changing or adding members at the GP entity level. [leading to a] change in control of funds. Maybe also, he says, there is a rebranding.
The real challenge, suggests Raynard, is simply to “get two VCs to agree on a value”.
And it depends entirely on their other options.