Traditional VCs turn to emerging managers for deal flow and, in some cases, new partners – ClearTips

Nasser Qadri, a Washington-based investor who has just raised $62.1 million for his debut venture fund, recently told us that as his fundraising gained momentum, he was approached by established firms looking to hire new talent. want to absorb.

He opted to go it alone, but he was hardly alone in attracting interest. Unsurprisingly, bringing budding managers into the fold is one of the new ways powerful venture firms remain powerful. Earlier last year, for example, crypto investor Ariana Simpson — who founded and manages her own crypto-focused hedge fund — was roped in as a deal partner in heavyweight firm Andreessen Horowitz.

Andy Chen, a one-time CIA weapons analyst who spent more than seven years with Kleiner Perkins, was in the process of raising his fund in 2018, when another major firm, hedge fund Cotu, was knocking. Today he helps lead the firm’s early-stage investment practice.

It’s easy to understand the appeal of firms that manage a lot of money and have tremendous power with the founders. Still, as older companies seek to recruit from a wider pool of new managers, they may have to wait for the brightest of the bunch; In some cases, like Qadri’s, they can be completely out of luck.

Of course, there’s a long list of reasons why so many people are deciding to raise funds these days, from the glut of capital looking to make their way into startups, to tools like AngelList’s rolling funds and revised rules around crowdfunding in the US. .

Emerging managers also specialize in capitalizing on the blind spots of the enterprise industry. A more experienced VC has immense wealth. An investor’s experience matters a lot, but there’s a lot to be said for those who are still establishing their reputations, who haven’t sat on more than a dozen boards, and whose future closely lies with their founders. will be connected.

Yet there are other trends that the establishment has long overlooked. Many companies probably regret not taking crypto seriously any time soon. Many male-heavy teams have also long ignored the growing economic power of women, driving the new managers home to their own investors.

Last but not the least, many have vehemently opposed to racially diversifying their ranks, creating an opening for investors of color who are acutely aware of changing demographics. According to census estimates, white Americans will represent a minority of the US population within 20 years, meaning that today’s racial minorities are becoming the primary engine of the nation’s growth.

New managers have shaken up the industry, which is arguably a good thing. Some are beginning to wonder whether they can maintain their independence, and the answer is not yet clear.

Like the startups they fund, many of these new managers are still working under the shadow of the firms that came before them. It also appears to be a covalent arrangement. Enterprise is an industry where collaboration between business competitors is inevitable, and it’s easier to stay on the good side of bigger companies when you’re investing a non-threatening amount in new companies that you’ll later introduce to the bigger players. .

Ensuring that things stay cohesive – and that deal flows keep coming – an increasing number of venture firms now take on the role of limited partner, to fund new managers. The Foundry Group was among the first to do this in an institutional manner five years ago, setting aside 25% of the new funds to be put into smaller venture funds. But this is happening regularly across the industry. Jake Paul’s new influencer-focused fund? Backed by Marc Andreessen and Chris Dixon of Andreessen Horowitz. Katie Stanton’s Moxie Ventures? Backed by Bain Capital Ventures.

The running joke is that the big firms have raised so much money that they don’t know where to put it all, but they are also protecting what they’ve built. It was clear thinking in 2015, when a then-crisis Kleiner Perkins tried to engage in merger talks with Social Capital, an enigmatic venture firm founded by Chamath Palihapitiya. (The deal reportedly broke down over who would eventually run the show. Kleiner later underwent an almost complete management change to regain his footing, while several members of Social Capital went on to start Tribe Capital.)

This is why we may see more venture firms begin to gauge the interest of new fund managers, which they feel can add value to their brand.

Perhaps, some would say yes to the brilliance and economics of a large firm and because it can be far easier to build a team than to work alone. Early-stage investor Semil Shah – who has built his own firm while working as a venture partner with different, established organizations (currently, including Lightspeed Venture Partners) – thinks this is “natural”. That’s a lot of new rolling funds”. In particular will either “burn out, stay small, or try to scale up and realize how hard it is, and perhaps have a larger firm after establishing a track record.”

If true, this is not a scenario that has been as widely adopted as some might imagine. Eric Bahn, who co-founded Bay Area-based seed-stage firm Hustle Fund in 2017, Twitter’s predictions last week

He later tweeted that “To be clear, Hustle Fund is not for sale.”

For her part, Sister says she is “concerned about industry consolidation.” “When it comes to women and other underrepresented groups, there have been systemic issues with the exclusion of VCs in the past.” He says that recently he’s “meet LPs—in the blink of an eye—actually like men who come from Stanford and have computer science degrees,” bothering him that even ” Even a team with good intentions can go back to the mean.”

An industry friend of Bann’s, Lolita Taub of The Community Fund — a $5 million early-stage fund focused on community-themed startups and backed by Boston-based seed-stage venture firm Flybridge — spoke about the potential of emerging managers. To be more optimistic is to be independent. Rather than grabbing smaller funds, he thinks more established players begin to fund — and nurture — emerging funds that have overlapping areas of interest.

Taub suggests this is the next step beyond VCs who have worked with so-called scouts to find undiscovered gems. “I think older players want to expand the reach of what they know.”

Both can be right. Somehow, the industry is changing shape and some form of consolidation, though not imminent, seems inevitable once the checks do fly. Some firms will break up, while others will form teams. Some managers will find themselves in top firms, while others will close up shop.

According to fund administration specialist Bob Renard of Standish Management in San Francisco, the only certainty right now is that “buying” a smaller fund with a larger fund isn’t that complicated.

Asked about the mechanics of such alliances, he said it “generally involves replacing or adding members at the GP unit level. [leading to a] Change in control of funds.”

Maybe, they even say, there is a rebranding.

The real challenge, suggests Renard, is “getting two VCs to agree on a price.” And it totally depends on their other options.

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