Record Venture Capital Fundraising Isn't Necessarily Good News for First-Time Fund Managers

The venture capital market has been experiencing a slowdown in recent months, with many firms holding onto their checkbooks as investors become more cautious. However, despite this trend, fund managers are taking advantage of the lull to fill up their coffers and prepare for the future.

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A Record-Breaking First Half

According to PitchBook, U.S. venture capital firms raised a staggering $121.5 billion in the first half of 2022, a significant leap from the $74.1 billion raised in the same period last year. This marks a record-breaking first half for VC fundraising, with 30 funds raising over $1 billion.

The Megafunds Dominate

While this success may seem impressive at first glance, it’s essential to note that the divide between the megafunds and smaller firms has widened significantly in recent months. In the first half of 2022, nearly two-thirds (63.9%) of venture capital was raised by just 30 funds, with many of these firms being larger, more established players.

This trend is not entirely new; larger firms have traditionally had an easier time raising large amounts of money due to their network and LP relationships. However, the gap between them and smaller firms has grown substantially this year.

First-Time Funds Struggle

In contrast, first-time funds are struggling to keep up with last year’s pace. While over 250 first-time funds were closed in 2021, only 70 such funds closed in the first half of 2022. This decline is likely due to investors becoming more cautious and hesitant to commit large sums of money.

Investors Stockpiling Ahead of a Downturn

Kyle Stanford, an analyst at PitchBook, believes that investors may be stockpiling ahead of a longer downturn in the market. He predicts a significant slowdown in the second half of 2022, citing the drastic drop in the market’s climate.

"I do think we will see a slow down in the back half of the year," Stanford said in an interview with TechCrunch. "Once we get to the end of Q3, of Q4, all the funds will have been going through, or up against, this climate for at least three-quarters of a year. I doubt many funds are entering the market right now."

Funds Not Meeting Their Targets

Stanford also noted that not every fund may be meeting their fundraising targets, which is in line with what an endowment told him they were seeing a few weeks ago.

"Funds aren’t going to get an extra $500 million right now," Stanford said. "You might as well close the fund, start investing out of it and move on."

LPs Pulling Commitments

Stanford also mentioned that LPs have been pulling commitments from funds, which is likely due to rebalancing their portfolio or taking commitments off the table.

"I would imagine there have been LPs that have been hit more than the broader market who have had to pull commitments," Stanford said. "We have heard anecdotally that many LPs committed their 2022 allowance in 2021."

Conclusion

The VC market is experiencing a slowdown, with fund managers taking advantage of the lull to fill up their coffers and prepare for the future. However, smaller firms are struggling to keep up with last year’s pace, and investors are becoming more cautious. As the market continues to evolve, it will be interesting to see how these trends shape the future of venture capital.

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