Is/isn’t the number of venture funds shrinking?
We’re now in the 36th month post the “high-velocity” period of 2020/2021 in venture capital and we keep hearing the same questions about emerging managers: Are/aren’t emerging funds facing insurmountable fundraising hurdles? Will a large percentage of them be unable to raise a subsequent fund? When will the number of active managers start to materially decline?
We expect emerging managers to survive long after they finish making new investments, even if they are unable to raise a follow-on fund. Given venture fund terms typically last for 12 years or more, a subset of the firm’s original GPs will need to continue monitoring the portfolio companies and see them through to an ultimate exit. The point is that we can’t answer the above questions directly. However, we wanted to share some information to provide insight into the current state of play. Clues we found from analyzing funds raised since 2020, and ‘GP cohort survival data,’ hint at significant challenges for many of today’s managers.
The number of first-time funds? No surprises …
Since 2020, 804 first-time funds have been raised by new early-stage managers (Figure 1). The number peaked in 2021 and has fallen precipitously to just 21% of that peak in 2024 YTD. 600 of the 804 funds formed were capitalized below $50 million, while just 5% exceeded $200 million.
Recent data shows declining second fund rates
We also recently performed a “GP cohort analysis,” similar to a customer cohort analysis we commonly leverage when evaluating SaaS companies. We reviewed all funds raised since 2000. As of Q2 2024, in aggregate, 41% of funds raised during this period never raised a subsequent fund. Not surprisingly, we found that the survival rate is worse in recent vintage years (Figure 2). Specifically, 47% of funds from the 2019 vintage, the latest cohort analyzed, have yet to raise a subsequent fund.
Impact of economic cycles on venture manager ‘retention’
Venture manager ‘retention’ shows notable dips linked to economic crises, highlighting the effects of macroeconomic factors on venture fundraising. Funds raised in 2009 had the lowest survival rates, reflecting the impact of the global financial crisis (Figure 3). A similar dip is now apparent in the 2019 cohort … so it appears as though the aftermath of the pandemic and subsequent market downturn impacted subsequent vintage fundraising success.
But the story’s far from written …
Despite the above, it is also worth noting that fund returns don’t necessarily follow a linear path, just as portfolio companies pivot and experience fits and starts. Since 1995, less than half of VC funds that ranked within the top quartile at the five-year mark remained in the top quartile at year 10 (Figure 4). Meanwhile, 30% ended up in the second quartile, 13% slipped to the third, and 9% dropped to the bottom quartile. On the other hand, moving up the ranks is far less common. Looking at the same data set, only 3.7% of funds that ranked in the fourth quartile on a net TVPI basis at year 5 ascended to the top quartile by year 10. This suggests that while early leaders have room to fall, the road from the bottom to the top is steep and not well-paved.
But we’re in the business of optimism! We strongly believe that the best founders are constantly questioning themselves and their businesses, seeking knowledge and making decisions quickly; also, that experienced and incentives-aligned investors can make a meaningful difference in a company‘s path by offering counsel and broad perspective. Although the number of funds that manage to climb from the fourth to the first quartile is small, their ascent shows the potential for success and underscores the importance of resilience, adaptability, and perhaps a bit of luck in navigating the venture landscape. So while the odds might be daunting for emerging and smaller managers, the story is far from fully-written and some will end up like their power-law portfolio companies and achieve great performance outcomes.
